Question

Since the outbreak of the Coronavirus Canadian financial markets including those for corporate bonds have become less liquid.

(a ) What is the likely explanation for the reduction of market liquidity in financial markets? Briefly explain.

(b ) What action could the Bank of Canada (BOC) take to help restore market liquidity in the financial markets? Briefly explain how this action would work to improve market liquidity.

Answer 1

Answer: covid 19 pandemic will have various effects on economic situations all over the world as it has disrupted the market,supply chains and product production and services.

Talking specifically about Canada , Since the outbreak of the Coronavirus Canadian financial markets including those for corporate bonds have become less liquid.

A). Question here asking about likely reasons for this So on of the many reasons of disruption in financial market and less liquidity of corporate bonds is that This pandemic has created the situation of uncertainty over the profitability and security and sustainability of corporate bonds as a result investors trust in financial instruments and markets have weakened.So investors are preferring to hold governemnt securities due to uncertainty created by corona virus.As they are more secure of investment while investing in government securities.

B) Bank of Canada has already taken few steps to ensure the liquidity in market like in march it has reduced the overnight rate to 1/4 percent along with it BOC has taken two other steps.

1.Commercial Paper Purchase Program (CPPP) to preserve the source of fund for the businesses which are currently facing crunch in funding due to low trust of investor in their bonds.

2.Bank will begin acquiring Government of Canada securities in the secondary market.for Complimenting the government's measures and easing the strains it has taken this step.

So BOC should continue to keep such measures in place along with easy money policy or expansionary money policy so that businesses can borrow on less interest rates when they start producing.

By taking such measures liquidity in financial market will improve further leading to normalcy in market conditions.

Hope it helps!

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