Effectiveness of Policy Interventions during Financial Crises

The stock market is a leading economic indicator, and a failure to stem a market crash can lead to a recession causing immense welfare implications for society. As the COVID-19 pandemic becomes a significant policy challenge, lessons can be learned by assessing past market interventions' success and failure.

To gain insights into the formulation of the necessary policy measures to address the challenges of the COVID-19 pandemic, we examine the effectiveness of past stock market interventions in China and Russia during the Great Financial Crisis in 2008. These two major markets provide an excellent natural laboratory for our investigation because they had varying ties to the US economy. The motivation stems from the enormous cost of dealing with global stock market shocks, the impact on the general economic welfare and the disruption of market mechanisms.

We find that the increase in global linkages between the financial markets corresponds to the decline in the power of domestic policies in stemming market crashes. A comparison of the Chinese and the Russian market shows that China, which had limited financial linkages with the US market, could prevent a major prolonged crash in its financial markets during the financial crisis. However, the same was not true for Russia that demonstrated much deeper financial linkages with the US.

To learn more, see the full article:

Vikkram Singh, Eduardo Roca & Bin Li (2021), Effectiveness of policy interventions during financial crises in China and Russia: Lessons for the COVID-19 pandemic (external link, opens in new window) , Journal of Policy Modeling, DOI: 10.1016/j.jpolmod.2021.01.004.