What would be the suggested monetary policy to combat recess

What would be the suggested monetary policy to combat recession?

Solution

Monetary policy should be based on a 360 degree view that means it should take decisions considering all the scenarios. If we see the monetary policy before 2008, it was very very open and accomodative with the main focus to increase the demand in the economy and making homes available for the all through providing cheap money i.e. keeping interest rates very low. But that interest rate policy lacked the key point regarding the potential risk of housing bubble and its subsquent causes. That also lacked the proper regultation and control on the things to whom to give the loans that includes checking the creditibility of the person taking loan.

I mentioned the above point to show that what exactly led to recession and if there was proper regulation and control over how to use low interest rates, we might not be in the economic slowdown which is still there till now from 2008.

The best possible way to combat the recession to support constructive spending in the economy by providing funding to government through buying government bonds that will be used to maintain aggregate demand in the economy and help the economy get rid of the recession.

Other step can be towards streghtening the banking system to cap the rising bad debt and get the economy out of financial instability.

Another can be through lowering interest rates , but which might not have any help when there is prolonged recession.