A more realistic assumption for constructing counterfactual financial conditions is to recognise that, in the event of policy inaction, financial markets – which were already highly destabilised – would have gone into a tailspin, sending the economy into a meltdown.
Building on recent advances in the macro-econometrics of estimating the impact of financial tail risks, preliminary results produced by ECB staff indicate that the ECB’s removal of the financial tail risk associated with the pandemic ensured a degree of support to growth that is several times larger than the impact derived by the more limited calculation shown in Chart 13.