Macro-Financial Stability in the COVID-19 Crisis: Some Reflections

The global financial system showed remarkable resilience during the COVID-19 pandemic, despite a sharp decline in economic activity and the initial financial market upheaval in March 2020. This article takes stock of the factors that contributed to this resilience, focusing on the role of monetary and financial policies. Drawing on the existing literature, it argues that the swift and decisive policy actions of major central banks in response to the pandemic-induced crisis played a key role in easing financial conditions and sustaining the flow of credit to the real economy. While the pandemic crisis has underscored the importance of policies in preventing calamitous financial outcomes, it has also brought to the fore some unintended consequences of policy actions—in particular, of providing prolonged monetary policy support and of applying regulation to specific segments of the financial system rather than taking a broader approach—that could undermine financial stability in the future. Expected final online publication date for the Annual Review of Financial Economics, Volume 15 is November 2023. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.