Evolving Monetary Policy Responses to Economic Recessions: A Systematic Literature Review
DOI:
https://doi.org/10.69569/jip.2025.675Keywords:
Economic recession, Financial stability, Monetary policy, Systematic literature review, Unconventional monetary policyAbstract
This paper conducts a systematic literature review to analyze the evolution and effectiveness of monetary policy in response to economic recessions. Despite abundant literature on this topic, a significant research void remains in providing an in-depth synthesis that bridges the pre- and post-2008 periods, including the COVID-19 pandemic. This systematic review addresses this gap by synthesizing evidence from 20 selected empirical studies to chart the significant transformation in central banking practices, particularly following the 2008 Global Financial Crisis and the COVID-19 pandemic. The analysis reveals a definitive paradigm shift from conventional interest rate adjustments to the widespread adoption of unconventional monetary policies. As policy rates hit the zero lower bound, quantitative easing and forward guidance tools became essential for providing stimulus, stabilizing financial markets, and supporting economic recovery. The findings consistently show that while these unconventional measures were effective, their impact is highly context-dependent and not without significant trade-offs. A primary conclusion drawn from the literature is the inherent tension between short-term crisis mitigation and the long-term risks to financial stability. While necessary to combat recessionary forces, prolonged periods of expansionary policy can foster asset bubbles and increase systemic vulnerabilities. The review concludes that the simple, one-size-fits-all approach to monetary policy is no longer viable. Effective modern central banking demands a pragmatic, adaptive, and holistic framework that integrates monetary instruments with fiscal and macroprudential oversight to navigate the complexities of future economic downturns.
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