Path to Recovery: Dangers of Cliff Effects

Study 04-03-2021

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. 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.