Can monetary policy mitigate the COVID-19 shocks? Based on the perspective of both the real economy and financial stability

Abstract

Using data from 10 major economies between January 2020 and December 2021, we examine whether monetary policy mitigates pandemic-related shocks on the real economy and financial stability. The key findings: First, COVID-19 adversely affects economic growth, price stability, and full employment, but not the balance of payments and financial stability; Second, monetary policy only mitigates the COVID-19 negative shock on economic growth; Third, emerging economies experience more extensive shocks than developed economies, with conventional and unconventional monetary policy in both subsamples mitigating a few parts of pandemic's negative impacts; Fourth, COVID-19 affects the real economy and financial stability through demand contraction, supply shock, and expected weakening channels, while monetary policy works only through the demand contraction channel. These findings offer insights for central banks to use monetary policy tools in mitigating negative shocks from future public health emergencies.