European exchange rate adjustments in response to COVID-19, containment measures and stabilization policies

The COVID pandemic had large effects on exchange rates. We know that the pure spread of the virus tends to depreciate exchange rates in the countries hit hardest. However, not only the virus but also containment and stabilization measures applied have an effect. To quantify those we build a granular dataset of three containment and two stabilization measures. We use a panel-VAR for nine European exchange rates vis-a-vis the Euro for the years 2020 and 2021. The results indicate that stricter movement restrictions, health care measures and more supportive monetary policies lead to a depreciation of the domestic currency. More expansionary fiscal policies by the domestic country, lead to an appreciation of the currency. The findings are rational given the fear associated with the extensive health care measures or movement restrictions dampening economic activity. Nevertheless, i.e. expansionary fiscal policy should be used to counteract depreciations driven by other policies.