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Financial stability considerations arising from the interaction of coronavirus-related policy measures

Author

Listed:
  • Rancoita, Elena
  • Grodzicki, Maciej
  • Kok, Christoffer
  • Metzler, Julian
  • Prapiestis, Algirdas
  • Hempell, Hannah S.

Abstract

Fiscal, prudential and monetary authorities have responded to the coronavirus (COVID-19) pandemic by providing unprecedented support to the real economy. Importantly, the combination of policy actions has done more to limit the materialisation of risks to households and firms than each policy individually. Exploiting complementarities and ensuring the most effective combination of policies will, however, be equally important when authorities start to phase out the various related relief measures. The fact that in particular the enacted fiscal and labour market measures, as well as their phase-out schedules, differ substantially across the largest euro area economies further complicates the challenge of obtaining the most effective policy combination. Along with the reduction in support to the real economy, the phasing-out of policy measures could adversely affect banks’ balance sheets and capitalisation. Resulting cliff effects in policy support are relevant for prudential authorities in the context of their future decisions on the replenishment of capital buffers. The results of the analysis suggest there are substantial risks associated with the early withdrawal of policy support, although the analysis does not account for the medium-term risks of protracted policy support. JEL Classification: C68, E52, E58, E62, E63, G21, H81

Suggested Citation

  • Rancoita, Elena & Grodzicki, Maciej & Kok, Christoffer & Metzler, Julian & Prapiestis, Algirdas & Hempell, Hannah S., 2020. "Financial stability considerations arising from the interaction of coronavirus-related policy measures," Financial Stability Review, European Central Bank, vol. 2.
    • Handle: RePEc:ecb:fsrart:2020:0002:1
    Note: 3455035
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    File URL: https://www.ecb.europa.eu//pub/financial-stability/fsr/special/html/ecb.fsrart202011_01~47160f35a4.en.html
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    Citations

    RePEc Biblio mentions

    As found on the RePEc Biblio, the curated bibliography for Economics:
    1. > Economics of Welfare > Health Economics > Economics of Pandemics > Specific pandemics > Covid-19 > Economic policy > Money and monetary policy

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hobelsberger, Karin & Kok, Christoffer & Mongelli, Francesco Paolo, 2022. "A tale of three crises: synergies between ECB tasks," Occasional Paper Series 305, European Central Bank.

    More about this item

    Keywords

    cliff effects; complementarities; Covid-19 policy measures; phase-out; policy interactions;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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