Financial markets

Chen Chen, Sudipto Dasgupta, Thanh Huynh, Ying Xia, 08 July 2020

Stay-at-home orders, when effective, can save both lives and the economy. Even though the short-term economic impact is very significant, not getting the pandemic under control can impose even higher economic costs in the future. This column studies the market reactions following staggered lockdown events across US states during Covid-19. It finds that returns on firms located in lockdown states are higher following the lockdown. These reactions can be interpreted as reflecting updated beliefs of market participants in the light of events that follow the lockdowns, such as compliance with stay-at-home orders.

David Bholat, 02 July 2020

Machine learning and artificial intelligence (AI) are at the heart of current transformations that some commentators have dubbed the ‘Fourth Industrial Revolution.’ The Bank of England, CEPR and Imperial College recently organised a virtual event to discuss how machine learning and AI are changing the economy and the financial system, including how central banks operate. This column summarises key topics discussed during the event and introduces videos recorded by some of the presenters, including Stuart Russell, Alan Manning, and the Bank of England’s Chief Data Officer, Gareth Ramsay. 

Divya Kirti, Mu Yang Shin, 20 June 2020

The grim impact of COVID-19 – extensive financial dislocations across asset classes and potentially large increases in morbidity and mortality – could pose a challenge to the insurance industry, particularly life insurers. This column urges central banks looking to preserve credit supply to account for changes in insurer risk appetite, which could take place well before capital levels approach regulatory thresholds. Financial stability assessments should examine the implications of the pandemic for insurers, which operate in some countries on a comparable scale to banks.

Gunther Capelle-Blancard, Adrien Desroziers, 19 June 2020

During the COVID-19 pandemic and the related economic fallout, the response of the stock markets has raised concerns as well as questions. This column explores the surprising trends. There is some evidence that shareholders have favoured the less vulnerable firms, and that credit facilities and government guarantees, lower policy interest rates, and lockdown measures mitigated the decline in stock prices. However, fundamentals only explain a small part of the stock market variations at the country level. Overall, it is hard to deny that the links between stock prices and fundamentals have been loose at best.

Viral Acharya, Raghuram Rajan, Jack Shim, 16 June 2020

While many theories of international borrowing emphasize its advantages, it has proven difficult to empirically establish a correlation between a developing country’s use of foreign financing and good outcomes such as stronger growth. This column proposes a theoretical framework that reconciles the above puzzle. It establishes that a developing country’s propensity to save is essential in determining whether the government’s ability to borrow in international markets is welfare improving for its citizens or not. Hence, debt is not always 'odious' and alternative policies such as debt ceilings may prove more useful, especially in the midst of the current pandemic.

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