Balanced Withdrawal of Policy Support to Avoid Cliff Effects

01-03-2021

The COVID-19 crisis has triggered unprecedented concerted economic policy response. The paper investigates potential cliff effects that may arise from the temporary nature of the measures adopted and their different phase-out schedules. It finds that the concern that premature policy tightening could jeopardise the recovery are overblown. The major challenges for economic policy lie in the medium term. This paper was provided by the Policy Department for Economic, Scientific and Quality of Life Policies at the request of the committee on Economic and Monetary Affairs (ECON) ahead of the Monetary Dialogue with the ECB President on 18 March 2021.

The COVID-19 crisis has triggered unprecedented concerted economic policy response. The paper investigates potential cliff effects that may arise from the temporary nature of the measures adopted and their different phase-out schedules. It finds that the concern that premature policy tightening could jeopardise the recovery are overblown. The major challenges for economic policy lie in the medium term. This paper was provided by the Policy Department for Economic, Scientific and Quality of Life Policies at the request of the committee on Economic and Monetary Affairs (ECON) ahead of the Monetary Dialogue with the ECB President on 18 March 2021.