COVID-19 and Financial Markets: A Panel Analysis for European Countries

In order to fight the economic consequences of the COVID-19 pandemic, monetary and fiscal policymakers announced a large variety of support packages which are often unprecedented in size. In this paper, we provide an empirical analysis of the responses of European financial markets to these policy announcements
in the spring of 2020. We assemble a granular set of more than 400 policy announcements, both at the national and the European level. We also differentiate between the first announcement in a series of policies and the subsequent announcements because the initial steps were often seen as bad news about the state of the economy. In a panel model, we find that monetary policy, in particular, through asset purchases, is effective in easing the pressure on governmental finances. Stock prices are particularly sensitive to the suspension of the Stability and Growth Pact. Fiscal policy becomes more effective when monetary announcements fall on the same day. We also find sizable cross-border effects of policy announcements.