Capital Markets, COVID-19 and Policy Measures

34 Pages Posted: 16 Aug 2020 Last revised: 4 Jan 2021

See all articles by Khalid ElFayoumi

Khalid ElFayoumi

International Monetary Fund

Martina Hengge

International Monetary Fund (IMF)

Multiple version iconThere are 3 versions of this paper

Date Written: August 14, 2020


The COVID-19 pandemic and associated policy responses triggered a historically large wave of capital reallocation between markets and asset classes. Using high-frequency country-level data, this paper examines if and how the number of COVID cases, the stringency of the lockdown, and the fiscal and monetary policy response determined the dynamics of portfolio flows. Despite more dominant global factors, we find that these domestic factors played an important role, particularly for emerging markets and bond flows, contributing to a global wave of reallocation to safer asset classes. Our results indicate that rising domestic COVID cases had a strong positive effect on portfolio flows, which responded to the increase in financing needs. Lockdown and fiscal policy measures also led to an increase in portfolio flows; however, evidence from the CDS market suggests that the increase in flows was dominated by supply forces, reflecting investors' preference for stronger policy responses. In contrast, we find that interest rate cuts led to a decline in portfolio flows as investors searched for higher yield. Finally, we show that COVID policy responses also affected countries' exposure to the global shock and that pre-COVID macroeconomic conditions, such as lower sovereign risk and higher trade openness, contributed to larger flows during the COVID episode.

Keywords: Capital flows, COVID-19, Lockdown stringency, Fiscal policy, Monetary policy, Pull factors, Emerging markets

JEL Classification: F3, F21, G11

Suggested Citation

ElFayoumi, Khalid and Hengge, Martina, Capital Markets, COVID-19 and Policy Measures (August 14, 2020). Available at SSRN: or

Khalid ElFayoumi (Contact Author)

International Monetary Fund ( email )

Washington, DC
United States

Martina Hengge

International Monetary Fund (IMF) ( email )

United States

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