Abstract
The policy response to the COVID-19 shock included regulatory easing across many jurisdictions to facilitate the flow of credit to the economy and mitigate a further amplification of the shock through tighter financial conditions. Using an intraday event study, this paper examines how stock prices – a key driver of financial conditions – reacted to regulatory easing announcements in a sample of 18 advanced economies and 8 emerging markets. It finds that regulatory easing announcements contributed to looser financial conditions but effects varied across sectors and tools. News about regulatory easing led to lower valuations for financial sector stocks, mainly in jurisdictions with relatively lower capital buffers. These results stand in stark contrast with valuations of non-financial sector stocks, which increased in response to regulatory relief announcements, particularly in industries that are more dependent on bank financing. The effects also differed across tools. Valuations declined and financial conditions tightened following announcements related to easier bank capital regulation while equity valuation rose and financial conditions loosened after those about liquidity regulation.
Acknowledgments
All authors are at the International Monetary Fund. We would like to thank Arpad Abraham, the editor, and an anonymous referee for suggestions that greatly improved the paper. We are also grateful to Martin Čihák, Gaston Gelos, Deniz Igan, Divya Kirti, Luc Riedweg, Mario Catalan, Luisa Zanforlin, and seminar participants at the IMF and the Singapore Training Institute for their valuable comments and suggestions. All remaining errors are our own. The views expressed in this paper are those of the authors and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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