In a new column on VoxEU, Professors Nathan Sussman and Rui Esteves of the Graduate Institute’s Centre for Finance and Development investigate the effects of the COVID19 pandemic on financial markets.
The two economic history experts look at financial data that shows that financial markets reacted strongly to the pandemic starting from February 2020. They note that this data looks very similar to the beginning of previous global recessions.
Comparing the effects of the pandemic on different markets, they show that the different death rates do not fully explain the differences in effects on financial markets. Rather, they notice that emerging markets are particularly vulnerable to the financial shock from the pandemic, which exposes "age-old vulnerabilities".
This finding highlights the need for credible, but flexible, sovereign currencies and the need to build up liquidity reserves.
Professors Esteves and Sussman also look at the effects of the pandemic on cryptocurrencies. They note that “before the crisis, the financial community and economists were deeply (and perhaps overly) interested in cryptocurrencies”. They find that during the current crisis, however, these cryptocurrencies did not offer a hedge against the global financial crisis, as they reacted very sharply to the crisis.
The two professors conclude, therefore, that central banks are right to treat this episode as "yet another global financial crisis" and that it demonstrates the needs for credible, but flexible, sovereign currencies and for building up liquidity reserves.
Read the entire column here on VoxEU. The column has been first published on VoxEU on 18 April 2020.
This article is part of our series Finance & Development Expertise, where we regularly present articles and other publications from the faculty of the Centre for Finance and Development (CFD). These include new publications as well as some of the best pieces from the archives.
Interested in more insights from economic history?
Discover our new online events series on macroeconomic history, coordinated by Rui Esteves and Nathan Sussman: European Macro History Online Seminar