Moral hazard, the fear of the markets, and how central banks responded to Covid-19. Jon Danielsson. Modelsandrisk.org

Moral hazard, the fear of the markets, and how central banks responded to Covid-19

January 28, 2021
While the direct economic consequences of Covid-19 have been significant, the impact on the financial markets has been more nuanced. This column uses a unique data set on the financial markets’ fears and perceptions of long-run financial risk to identify how Covid-19, and particularly Fed policy responses to Covid-19, affected global market fears. While some Fed interventions had little or no impact on market fear, the most powerful were the US dollar swap lines, which strongly reduced the perceived likelihood of global market losses decades into the future. The results suggest that the Fed's relative global role has been strengthened, possibly at the cost of increased moral hazard.

Published on VoxEU.org

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