Path to Recovery: Dangers of Cliff Effects

Summary:

From the onset of the COVID-19 pandemic, fiscal, monetary and prudential authorities were quick to provide an unprecedented level of support to the real economy and the financial system. Most adopted measures are temporary and due to be phased out once economic and financial conditions start improving. However, an untimely and divergent phase-out would introduce potentially destabilising cliff effects that could lead to increased fragility among euro area governments, firms and households.

Four papers were prepared by the ECON Committee’s Monetary Expert Panel, discussing the possible cliff effects and ways to mitigate them, while weighing the benefits and costs of protracted policy support.

Further information:

This publication is prepared by Policy Department A for the Committee on Economic and Monetary Affairs (ECON), ahead of the Monetary Dialogue with ECB President Lagarde on 18 March 2021.

Tables of Contents:

• The Challenging Cliff-Edge | Charles Wyplosz
• Adjusting Support in a K-Shaped Recovery | Daniel Gros & Farzaneh Shamsfakhr
• Balanced Withdrawal of Policy Support to Avoid Cliff Effects | Klaus-Jürgen Gern
• From the Cliff to the Top: The Path to a Resilient and Sustainable Europe | Jan Phillip Fritsche, Anna Gibert & Chi Hyun Kim

• Alternative Source 1