The effects of monetary policy response to the Covid-19 crisis on dynamic connectedness across financial markets in Central and Eastern Europe


Objective: This study investigates the effects of monetary policy interventions in Central and Eastern European (CEE) economies on shifts in financial market linkages during the Covid-19-induced crisis. We explore the market reaction to both standard and non-standard (e.g., quantitative easing) monetary policy announcements by central banks in Czechia, Hungary, Poland, and Romania, and analyse the way they affected sovereign bond and stock market linkages. The analysis is further extended to include international spill-over effects.

Research Design & Methods: We first quantify a set of time-varying asset correlations using asymmetric generalised DCC-GARCH models and daily data on financial asset returns. Going beyond the domestic stock-bond interdependencies, we explore cross-border connectedness between CEE economies, Germany, and the US. Next, we investigate the effects of detailed central bank announcements, as they unfolded during the Covid-19 crisis.

Findings: We find that, by and large, the CEE central bank interventions conducted in 2020 alleviated domestic and cross-border pressures in financial market linkages triggered by the global risk shock, such as contagion and flight-to-safety effects. However, monetary policies had largest impact at the height of the crisis when central banks in the region introduced substantial interest-rate cuts and unconventional measures, which were used by those banks for the first time or on such a wide scale.

Implications & Recommendations: Our results imply that monetary authorities may partly mitigate the transmission of global shocks to domestic financial markets, even when it comes to small open economies. However, the effects of monetary policies proved strongest at the onset of the crisis and seem to have been related to unconventional policy tools and aggressive interest rate cuts.

Contribution & Value Added: We examinee linkages across the two largest asset classes, sovereign bonds and equities, both within CEE economies and between each of them and Germany and the US (traditionally perceived as safe havens), while controlling for potential structural breaks, global risk measures, and Covid-19-related indicators, such as the number of Covid-19 cases and the government-response stringency indices. Event studies conducted in the article are based on a comprehensive dataset on policy interventions launched during 2020.



COVID-19 pandemic; financial markets; financial linkages; monetary policy; quantitative easing; Central and Eastern Europe

Afonso, A., Jalles, J.T., & Kazemi, M. (2020). The effects of macroeconomic, fiscal and monetary policy announcements on sovereign bond spreads. International Review of Law and Economics, 63, 105924.

Akhtaruzzaman, M., Boubaker, S., & Sensoy, A. (2021). Financial contagion during COVID-19 crisis. Finance Research Letters, 38, 101604.

Altavilla, C., Carboni, G., & Motto, R. (2021). Asset purchase programs and financial markets: Lessons from the euro area. International Journal of Central Banking, 17(4), 1-48.

Altig, D., Baker, S., Barrero, J.M., Bloom, N., Bunn, P., Chen, S., … Thwaites, G. (2020). Economic uncertainty before and during the COVID-19 pandemic. Journal of Public Economics, 191, 104274.

Angosto-Fernández, P. L., & Ferrández-Serrano, V. (2022). World capital markets facing the first wave of COVID-19: Traditional event study versus sensitivity to new cases. Economics and Business Review EBR, 22(4), 5-38. 10.18559/ebr.2022.4.2

Arslan, A., Drehmann, M., & Hofmann, B. (2020). Monetary policy response in emerging market economies: why was it different this time?. (20)9. Retrieved from on January 11, 2022.

Aslam, F., Nogueiro, F., Brasil, M., Ferreira, P., Mughal, K. S., Bashir, B., & Latif, S. (2021). The footprints of COVID-19 on Central Eastern European stock markets: an intraday analysis. Post-Communist Economies, 33(6), 751-769.

Bai, J., & Perron, P. (2003). Computation and analysis of multiple structural change models. Journal of Applied Econometrics, 18(1), 1-22.

Beirne, J., Renzhi, N., Sugandi, E., & Volz, U. (2021). COVID-19, asset markets and capital flows. Pacific Economic Review, 26(4), 498-538.

Belaid, F., Ben Amar, A., Goutte, S., & Guesmi, K. (2021). Emerging and advanced economies markets behaviour during the COVID-19 crisis era. International Journal of Finance and Economics.

Benmelech, E., & Tzur-Ilan, N. (2020). The determinants of fiscal and monetary policies during the COVID-19 crisis. NBER Working Papers, 27461.

Bouri, E., Cepni, O., Gabauer, D., & Gupta, R. (2021). Return connectedness across asset classes around the COVID-19 outbreak. International Review of Financial Analysis, 73, 101646.

Campbell, J.Y. (1991). A Variance Decomposition for Stock Returns. The Economic Journal, 101(405), 157.

Chari, A., Dilts Stedman, K., & Lundblad, C.T. (2020). Capital Flows in Risky Times: Risk-on / Risk-off and Emerging Market Tail Risk. NBER Working Paper Series, 27927.

Delatte, A.L., & Guillaume, A. (2020). Covid 19: a New Challenge for the EMU?. CEPR Discussion Paper, 14848. Retrieved from

Dempere, J. (2021). Control of the first wave of COVID-19: Some economic freedom-related success factors. Journal of International Studies, 14(4), 187-200. doi:10.14254/2071-8330.2021/14-4/13

Elgin, C., Yalaman, A., Yasar, S., & Basbug, G. (2021). Economic policy responses to the COVID-19 pandemic: The role of central bank independence. Economics Letters, 204(C).

Falagiarda, M., & Reitz, S. (2015). Announcements of ECB unconventional programs: Implications for the sovereign spreads of stressed euro area countries. Journal of International Money and Finance, 53, 276-295.

Fratto, C., Harnoys Vannier, B., Mircheva, B., de Padua, D., & Poirson Ward, H. (2021). Unconventional Monetary Policies in Emerging Markets and Frontier Countries. IMF Working Papers, 014.

Ghosh, A.R., Ostry, J.D., & Chamon, M. (2016). Two targets, two instruments: Monetary and exchange rate policies in emerging market economies. Journal of International Money and Finance, 60, 172-196.

Grabowski, W. (2019). Givers or Recipients? Co-movements between stock markets of CEE-3 and developed countries. Sustainability, 11(22), 6495.

Grabowski, W., Janus, J., & Stawasz-Grabowska, E. (2023). The COVID-19 pandemic and financial markets in Central Europe: Macroeconomic measures and international policy spillovers. Emerging Markets Review, 54, 100991.

Grabowski, W., & Stawasz-Grabowska, E. (2021). How have the European central bank’s monetary policies been affecting financial markets in CEE-3 countries?. Eurasian Economic Review, 11, 43-83.

Halmai, P. (2022). COVID-19 Crisis and Supply Side Bottlenecks in the EU. Shorter and Longer Term Prospects. Montenegrin Journal of Economics, 18(4), 19-30.

Jannsen, N., Potjagailo, G., & Wolters, M.H. (2019). Monetary policy during financial crises: Is the transmission mechanism impaired?. International Journal of Central Banking, 15(4), 81-126.

Janus, J. (2021). The COVID-19 shock and long-term interest rates in emerging market economies. Finance Research Letters, 43, 101976.

Karkowska, R., & Urjasz, S. (2021). Connectedness structures of sovereign bond markets in Central and Eastern Europe. International Review of Financial Analysis, 74, 101644.

Klose, J., & Tillmann, P. (2021). COVID-19 and Financial Markets: A Panel Analysis for European Countries. Jahrbucher Fur Nationalokonomie Und Statistik, 241(3), 297-347.

Koca, Z. (2022). Government Responses to COVID-19: A Comparative Analysis of Visegrad Countries. Central European Public Administration Review, 20(1), 57-84.

MacKinlay, A.C. (1997). Event Studies in Economics and Finance. Journal of Economic Literature, 35(1), 13-39.

Moessner, R., & de Haan, J. (2021). Effects of monetary policy announcements on term premia in the euro area during the COVID-19 pandemic. Finance Research Letters, 44, 102055.

Papadamou, S., Fassas, A.P., Kenourgios, D., & Dimitriou, D. (2021). Flight-to-quality between global stock and bond markets in the COVID era. Finance Research Letters, 38, 101852.

Pietrzak, M.B., Fałdziński, M., Balcerzak, A.P., Meluzín, T., & Zinecker, M. (2017). Short-term shocks and long-term relationships of interdependencies among central european capital markets. Economics and Sociology, 10(1), 61-77.

Rebucci, A., Hartley, J., & Jiménez, D. (2021). An Event Study of COVID-19 Central Bank Quantitative Easing in Advanced and Emerging Economies. NBER Working Papers, 27339.

Sever, C., Goel, R., Drakopoulos, D., & Papageorgiou, E. (2020). Effects of Emerging Market Asset Purchase Program Announcements on Financial Markets During the COVID-19 Pandemic. IMF Working Paper, 292.

Uddin, M., Chowdhury, A., Anderson, K., & Chaudhuri, K. (2021). The effect of COVID – 19 pandemic on global stock market volatility: Can economic strength help to manage the uncertainty?. Journal of Business Research, 128, 31-44.

Umar, Z., Manel, Y., Riaz, Y., & Gubareva, M. (2021). Return and volatility transmission between emerging markets and US debt throughout the pandemic crisis. Pacific-Basin Finance Journal, 67, 101563.

Wang, D., Li, P., & Huang, L. (2022). Time-frequency volatility spillovers between major international financial markets during the COVID-19 pandemic. Finance Research Letters, 46, 102244.

Wei, X., & Han, L. (2021). The impact of COVID-19 pandemic on transmission of monetary policy to financial markets. International Review of Financial Analysis, 74, 101705.

Yarovaya, L., Brzeszczyński, J., Goodell, J.W., Lucey, B., & Lau, C.K.M. (2022). Rethinking financial contagion: Information transmission mechanism during the COVID-19 pandemic. Journal of International Financial Markets, Institutions and Money, 79, 101589.

Yilmazkuday, H. (2021). COVID-19 and Monetary policy with zero bounds: A cross-country investigation. Finance Research Letters, 44, 102103.

Youssef, M., Mokni, K., & Ajmi, A.N. (2021). Dynamic connectedness between stock markets in the presence of the COVID-19 pandemic: does economic policy uncertainty matter?. Financial Innovation, 7(1), 1-27.

Zhang, D., Hu, M., & Ji, Q. (2020). Financial markets under the global pandemic of COVID-19. Finance Research Letters, 36, 101528.

Żak, M., & Garncarz, J. (2020). Coronavirus epidemic management and economic policy towards the challenges associated with the COVID-19 epidemic in selected European Union countries. International Entrepreneurship Review, 6(4), 21-34.

Published : 2023-03-31

GrabowskiW., JanusJ., & Stawasz-GrabowskaE. (2023). The effects of monetary policy response to the Covid-19 crisis on dynamic connectedness across financial markets in Central and Eastern Europe. Entrepreneurial Business and Economics Review, 11(1), 7-28.

Wojciech Grabowski 
University of Lodz  Poland

PhD in economics (2011); Associate Professor (2020) at the Department of Econometric Models and Forecasts, University of Lodz (Poland). His research interests concentrate mainly on econometric methods of analysis of non-stationary and high-frequency data.

Jakub Janus
Cracow University of Economics  Poland

Assistant professor in the Department of Macroeconomics at the Cracow University of Economics, main interests: macroeconomics, monetary policy, international economics, macroeconometrics.

Ewa Stawasz-Grabowska 
University of Lodz  Poland

PhD in finance (2017); Assistant Professor at the Department of International Finance and Investment, University of Lodz (Poland). Her research interests concentrate mainly on monetary and financial policy in the euro area.

Creative Commons License

This work is licensed under a Creative Commons Attribution-NoDerivatives 4.0 International License.

Authors who publish with this journal agree to the following terms:

  1. Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a CC BY-ND licence that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
  2. Authors are asked to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.

 Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) only the final version of the article, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access). We advise using any of the following research society portals:

Most read articles by the same author(s)