Resilience and Strategic Adaptation of Monetary Policy in the Incidence of External Shocks (Literature Review)

Abstract

This paper represents a literature review, and examines the strategic adaptation of monetary policy under the influence of external shocks in small open economies, as well as its capacity to support economic and financial resilience, depending on the type of shock and other influencing factors. The article is structured as a theoretical synthesis composed of a review of the literature and policy practices’ evidence. The main focus of the study consists of exploring available monetary policy tools’ capacity to tackle the external shocks affecting key transmission channels. Special attention is given to the operational and institutional constraints alongside policy trade-offs associated with the effective conduct of monetary policy in current external conjunctures, marked by high uncertainty, interdependence, and mixed geopolitical trends. While the topic is intensely discussed by academia and policymakers, literature offers a relatively limited comprehensive approach and a conceptual insight into these challenges, in particular with direct relevance for small open economies, characterised by specific structural features such as limited capital mobility, partial exchange rate flexibility, and often opaque transmission mechanisms; this study is an attempt to contribute to that particular (sub) field of study. The conclusions are multifold; first, there is no universal framework capable of fully absorbing external shocks in such contexts, but there are limits of monetary policy which can be tried to be overcome. Rather, a flexible and adaptive policy mix appears to have positive contribution to achieving its objectives - one grounded in rigorous macroeconomic understanding of the current situation, supported by institutional credibility, and coordinated closely with the general economic growth strategy of the state. JEL: E52; E58; F41; F44; H12; O23