Do economic recession and financial crisis alter the effect of monetary policy on bonds and the stock market liquidity? If so what are the transmission mechanism?

Good question. The answer depends on the source of the problem. In the current global recession, the monetary and fiscal policies both are ineffective. The need is for vaccine, treatment, and assistance to those who lost their source of income.

Central Banks in advanced countries lowered interest rates (some countries have negative interest rates) and started huge programs to buy even junk bonds and directly loan struggling businesses. Governments spent trillions to maintain their economies and prevent them from further deterioration. Investment spending and consumption spending decreased, understandably, due to uncertainty about future investment opportunities and employment. (the objective is NOT to stimulate the economies). The response to changes in monetary policy does not yield the expected results. Most of the increase in high power money went repaying old debt or the stock markets.

No matter how hard one tries unless the source of the problem is treated, economic policies will remain ineffective.

Dear Megersa Debela Daksa ,

Your question is very interesting and for this reason vast theoretical approaches have been developed.

I would suggest you search for the following work with reference to the current pandemic:

https://www.ecb.europa.eu/pub/economic-bulletin/focus/2020/html/ecb.ebbox202005_03~12b5ff68bf.en.html

Indicatively you could study the working paper of:

Ferdinandusse, M. and Freier, Maximilian and Ristiniemi, Annukka, Quantitative Easing and the Price-Liquidity Trade-Off (May, 2020). ECB Working Paper No. 20202399, Available at SSRN: https://ssrn.com/abstract=3592423

Finally, would I recommend the paper?

Chun, A. L. (2011). Expectations, Bond Yields and Monetary Policy. Review of Financial Studies, 24(1), 208-247. https://doi.org/10.1093/rfs/hhq090

Do economic recession and financial crisis alter the effect of monetary policy on bonds and the stock market liquidity? If so what are the transmission mechanism?

I am of the view that in the current global recession, the monetary and fiscal policies are not effective. Some assistance to the affected countries which lost their sources of income need to be provided without fail.

In Advanced Countries, the Central Banks mostly lowered interest rates; some countries also have even negative interest rates. Many attractive programs are introduced to buy bonds and the loans at concessional rate of interest were directly extended to struggling businesses. Governments monitor meticulously and spend trillions of money to develop their economies and prevent them from further deterioration. It is also to be noted that spending on investment and consumption got decreased due to uncertainty about future opportunities in investment and employment. Hence, the response to changes in monetary policy does not yield the expected results. Most of the increase in high powered money went for repaying old debt; thus not significantly contribute for the economic development.

The economic policies will remain ineffective as long as the sources of the problem are not effectively addressed by the respective countries.

The artificial increase of the monetary volume decreases bond and stock market values; money flows into real estate and similar hard assets, while lessening overall total human economic productivity. The prolongation of such monetary policy will result in full economic regression and state commanded economy. The lower the interest rate in these policy interventions, the higher the risk of economic collapse of the whole market system. The political tendency of a capitalist planned economy can be an acute (short-time) 'medical' measure, but it is lethal to whole economic machinery, if it becomes a chronic therapy for crisis of a societal system.