Unconventional Monetary Policy and Disaster Risk: Evidence from the Subprime and COVID-19 Crises

Abstract

Following the outbreak of the COVID-19 pandemic, the Federal Reserve (Fed) and Central Banks around the world multilaterally conducted a mix of unconventional monetary policies. We evaluate the effects of these recent interventions vis-a-vis earlier episodes of Quantitative Easing (QE) unilaterally conducted by the Fed in response to the subprime crisis. Using model-free measures of disaster risk in asset markets derived from daily options data, we document direct and spillover effects. Critically, the announcement of the Fed’s QE in response to the subprime crisis is followed by a reduction in disaster risk for the US and, on average, an increase in emerging markets disaster risk. Conversely, interventions during the COVID-19 crises are generally associated with sizeable reductions in disaster risk in the US and other international equity markets. Our results support the notion that collective actions by central banks have substantial effects in reducing investors' perceptions of disaster risk and reinforce concerns of unintended consequences of unilateral monetary interventions raised by emerging markets' policymakers during the subprime crisis.

Keywords: monetary policy, quantitative easing, disaster risk, COVID-19

JEL Classification: G15, E52, E58