How Central Bank Policies Influence Inflation and Market Stability in the Post Pandemic Era

Abstract

This paper examines the influence of central bank policies on inflation dynamics and financial market stability in the aftermath of the COVID 19 pandemic. Drawing on three core strands of monetary theory monetary transmission mechanisms, inflation channels, and stability channels it quantifies the effects of both conventional (policy rate adjustments, reserve requirements, open market operations) and unconventional tools (quantitative easing, targeted liquidity facilities, backstop measures) across advanced and emerging economies between 2020 and 2024. Employing a convergent parallel mixed methods design, we integrate panel VAR and GARCH(1,1) econometric models with Difference in Differences analyses, alongside qualitative case studies of the Federal Reserve, European Central Bank and Reserve Bank of India. Quantitative findings reveal that a 25 bp policy rate reduction reduces CPI growth by 0.15 pp in advanced economies (versus 0.08 pp in emerging markets) after four quarters, while large scale asset purchases lower conditional equity market volatility by approximately 12%. Reserve ratio cuts in over thirty jurisdictions released more than US$1 trillion of liquidity, compressing interbank premia by up to 20%. Qualitative evidence highlights the critical role of forward guidance and macroprudential buffers in anchoring expectations and preserving systemic resilience. Cross regional comparisons underscore significant heterogeneity in transmission speed and potency, linked to institutional depth and market structure. Our analysis demonstrates that, although traditional interest rate tools remain foundational, their efficacy wanes near the effective lower bound, necessitating a diverse toolkit of balance sheet interventions. The study concludes that policy flexibility, clear communication and international coordination are essential to manage inflationary pressures and safeguard market stability in a persistently uncertain global environment.