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A Review of the Bank of Canada’s Market Operations related to COVID-19

Author

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  • Grahame Johnson

Abstract

The economic lockdowns that began in March 2020 in response to the COVID-19 pandemic led to an unparalleled level of financial market disruption. Investors sought liquidity by selling financial assets and drawing down loans and credit lines. The speed, scale and one-way nature of these transactions caused an almost complete breakdown of market functioning. In response, the Bank of Canada launched 10 extraordinary programs, 9 of which had never been used before, to restore market functioning. As market conditions improved, 9 of the 10 programs were wound down. One, the Government of Canada Bond Purchase Program, was continued and transitioned into a monetary policy tool. In general, most of the programs were well designed and effectively executed—an impressive achievement given the circumstances under which they were conceived, developed and deployed. The extreme level of uncertainty and the magnitude of the downside risks to economic and financial activity warranted an aggressive response. Going forward, however, several areas exist where program design and implementation could be changed if these programs ever need to be used again. Overall, the design and implementation recommendations for future interventions focus on the need to ensure the programs are appropriately structured, in terms of both size and duration, for the financial and economic circumstances. Given the speed with which the outlook can change, program parameters must be flexible, and the Bank must be nimble in making the necessary adjustments.

Suggested Citation

  • Grahame Johnson, 2023. "A Review of the Bank of Canada’s Market Operations related to COVID-19," Discussion Papers 2023-6, Bank of Canada.
    • Handle: RePEc:bca:bocadp:23-6
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    References listed on IDEAS

    as
    1. Gilchrist, Simon & Wei, Bin & Yue, Vivian Z. & Zakrajšek, Egon, 2024. "The Fed takes on corporate credit risk: An analysis of the efficacy of the SMCCF," Journal of Monetary Economics, Elsevier, vol. 146(C).
    2. O'Hara, Maureen & Zhou, Xing (Alex), 2021. "Anatomy of a liquidity crisis: Corporate bonds in the COVID-19 crisis," Journal of Financial Economics, Elsevier, vol. 142(1), pages 46-68.
    3. Cimon, David A. & Walton, Adrian, 2024. "Central bank liquidity facilities and market making," Journal of Banking & Finance, Elsevier, vol. 162(C).
    4. Rohan Arora & Sermin Gungor & Joe Nesrallah & Guillaume Ouellet Leblanc & Jonathan Witmer, 2021. "The impact of the Bank of Canada’s Government Bond Purchase Program," Staff Analytical Notes 2021-23, Bank of Canada.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Coronavirus disease (COVID-19); Financial markets; Financial stability;
    All these keywords.

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management

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