Do stock markets play a role in determining COVID-19 economic stimulus? A cross-country analysis

Abstract

This paper makes an innovative contribution to the extant literature by analysing the determinants of economic stimulus packages implemented by governments in response to the COVID-19 pandemic. In particular, we explore whether stock market declines observed in many countries can predict the size of COVID-19 stimulus packages. Moreover, we explore whether a country's level of income can augment the underlying relationship between stock market declines and stimulus packages. The findings reveal that a larger stock market decline results in a larger stimulus package; however, this effect is only observed in countries that have an income level greater than the mean and/or median per capita gross domestic product (GDP). Moreover, our results show that monetary policy is more responsive to a stock market decline than fiscal policy. Thus, our results underscore the importance of international donor agencies such as the World Bank and International Monetary Fund (IMF) in supporting less affluent countries in coping with the adverse impacts of the COVID-19 pandemic on their economies.