The impact of a crisis on monetary policy’s influence on financial markets: Evidence from the COVID-19 pandemic

Abstract

This study analyzes the effect of monetary policy, measured by interest rates and money supply, on financial markets. Furthermore, it studies the impact of a crisis on monetary policy’s influence on financial markets. The stock and the bond market are used to reflect financial markets. This quantitative study is based on daily data from Thailand before, during and after the COVID-19 pandemic for 15 years. The article finds that interest rate and money supply increases lead to increased stock returns and increased government bond yields. Moreover, during a crisis, interest rate and money supply changes have a larger impact on stock returns and bond yields. The greater the severity of a crisis, the larger the effect of interest rate and money supply changes on financial markets. The results suggest that the central bank may use monetary policy to a different extent during a crisis than during normal times. Investors should consider adjusting their investment strategies during times of crisis to account for the larger impact of monetary policy on financial markets.