How monetary policy shapes company and business strategies: comparing two crises

E-mail: [email protected].es ISSN 0212-1867 / e-ISSN 1989-3574 CC-BY ESIC University https://revistasinvestigacion.esic.edu/esicmarket Gonzalo Salas Muñoz University of Granada, Spain [email protected].es Juan F. Prados-Castillo University of Granada, Spain [email protected] José María Martín Martín* University of Granada, Spain [email protected] Received: 24-11-2023; Accepted: 23-05-2024; Published: 25-04-2025 Abstract Objective and interest of the work: This research analyses the monetary policy developed during the last two major economic crises. It seeks to compare both lines of action and to analyse the effect that the direction of these policies has had on the business context. It considers the impact on managerial choices, market positioning and marketing tactics from a macroeconomic perspective. Design of the methodology: The methodology used was a structured Boolean search across selected databases, focusing on how shifts in monetary policy influence managerial decisions, marketing and overall business strategies. Various sources, including monographs, official reports and articles, were consulted to provide a comprehensive analysis. Results: The results highlight how the ECB’s monetary policy during the COVID-19 pandemic differed from its approach during the 2008 financial crisis, with a more rapid and extensive response. The implications for businesses are significant because these policies influence macroeconomic indicators and require adjustments in strategic decisions and operations. High levels of public debt, coupled with rising inflation and economic stagnation, present additional complexities. How monetary policy shapes company and business strategies: comparing two crises Esic Market Economics and Business Journal Vol. 56, n.º 2, May-August 2025, e337 How to cite: Salas Muñoz, G., Prados-Castillo, J. F. & Martín Martín, J. M. (2025). How monetary policy shapes company and business strategies: comparing two crises. ESIC Market. Economics and Business Journal, 56(2), e337. DOI:10.7200/esicm.56.337 * Correspondence author: [email protected] 2Gonzalo Salas Muñoz, et al. Practical implications: In terms of practical implications, this study underscores the importance of businesses understanding and adapting to monetary policies. The monetary policy decisions of central banks have a cascading effect on firms, affecting management, marketing, financial planning, investment decisions and global trade dynamics. Managers should be agile and foster a culture of continuous learning to respond effectively to monetary policy shifts. Keywords: monetary policy; business management; investment decisions; financial risk; business adaptability JEL Codes: E22; E52; M40 1. Introduction By the end of 2019, European nations appeared to have overcome the shadows of the 2008 financial crisis (Ar, 2018), looking ahead with positive economic projections (Troitiño, 2013). However, 2020 brought an unexpected twist with the onset of the COVID-19 pandemic, triggering a global health emergency with deep-seated economic and societal impact (Andreu-Sánchez & Martín-Pascual, 2021). In its bid to manage the crisis, the EU witnessed many of its Member States enforce rigorous lockdowns to mitigate the proliferation of the virus (Pinilla et al., 2021). Faced with unprecedented challenges, the European Central Bank (ECB) took centre stage in the economic realm by implementing an assertive expansionary monetary policy (Tabak et al., 2016). The primary goal of the policies was to stabilise the economy, but their effects on the corporate sector soon became apparent. Here, the relationship between monetary policy and business strategy is revealed, with changes in monetary policy affecting managerial decisions, market positioning and consumer engagement (Ling-Ling, 2019). Shifts in monetary policy have directly shaped strategic planning, market alignment and consumer dynamics. This study explores the intricate relationship between monetary policies and their impact on business strategies, managerial choices and marketing tactics from a macroeconomic perspective. European economies appeared to have recovered from the 2008 financial recession by the end of 2019; however, according to Troitiño (2013), the COVID-19 pandemic had a devastating impact on the global economy and social structures. In response to the pandemic, EU countries implemented significant activity restrictions (Pinilla et al., 2021) and population confinement measures to slow the spread of the virus. The European Central Bank (ECB) also took an unprecedented expansionary path to ensure economic liquidity and counteract the effects of the pandemic (Cohen & Burinskas, 2020). With this work we seek to offer a clear picture of the different monetary policy strategies that were applied during the last two major crises, thus identifying the impact that each strategy may have had on business activity. We begin by providing an overview of the ECB’s mandate, its position within the European Union, its organisational structure and its primary actions to achieve its goals. We then delineate the economic context leading up to the economic crisis and the ECB’s 3 How monetary policy shapes company and business strategies: comparing two crises reaction to the 2008 crisis (Gertler & Gilchrist, 2018). This exploration distinguishes between conventional measures and those uniquely introduced because of the magnitude of the crisis. The monetary policy crafted in reaction to the pandemic is examined from three facets: the strategies adopted during the pandemic peak (Feyen et al., 2021; Jinjarak et al., 2021), the economic outcomes of these strategies, and the post-COVID measures, defined as those initiated after vaccination. We also evaluate the global monetary policy reaction, particularly in major western and eastern countries such as the United States, United Kingdom, Japan and China (Srithilat et al., 2022). To address the unparalleled challenges, the European Central Bank (ECB) intervened in the economic arena and introduced a comprehensive expansionary monetary policy (Hatmanu & Căutișanu, 2021). The ultimate aim was to stabilise the economy, but the consequences of these policies went beyond mere macroeconomic parameters. Businesses, especially in the fields of management and marketing, are forced to operate in a transformed environment in which monetary policy changes have a direct impact on strategic choices, market positioning and consumer behaviour (Aldriweesh et al., 2022). These shifts have varying impacts on firms’ revenues, expenses and net sales across different industries (Binz et al., 2022; Jansen et al., 2013). This further highlights the impact of monetary policy in different sectors and regions, indicating subtle effects on business operations (Guangming & Si, 2013). The work is structured as follows. First, a review of the theoretical framework underpinning the research is provided. Once this is done, the methodological development applied in this research, including the research questions, is presented. This is followed by a comparative analysis of the monetary policies developed to face the last two major crises. The last sections reflect on the business implications of these policies. 2. Theoretical framework Monetary policy, as a crucial component of macroeconomic management, plays a pivotal role in shaping the economic landscape of a nation. The theories surrounding monetary policy have evolved over time, reflecting the dynamic nature of global economies (Friedman, 1968). To comprehend the evolution of monetary policy theories, it is essential to delve into their historical roots. The gold standard, which prevailed during the 19th and early 20th centuries, had a prominent influence on early monetary policy (Mankiw, 2000). Under this system, currencies were pegged to a specific amount of gold, providing stability but limiting the flexibility of monetary authorities. The Great Depression of the 1930s prompted a shift in thought, leading to the adoption of Keynesian economics and the recognition of the role that monetary policy could play in stabilising the economy. 4Gonzalo Salas Muñoz, et al. One of the most influential theories that emerged in the mid-20th century is monetarism, championed by economists such as Milton Friedman (Friedman, 1968). Monetarists argue that the primary determinant of economic activity is the money supply. They contend that central banks should focus on controlling the money supply to maintain price stability and promote long-term economic growth. Friedman famously declared that “inflation is always and everywhere a monetary phenomenon”, emphasising the importance of monetary factors in economic fluctuations. Critics of monetarism argue that it oversimplifies the complex dynamics of the economy, neglecting the role of other variables such as fiscal policy and financial market imperfections. Despite the criticisms, monetarism has left an indelible mark on monetary policy discussions and has influenced the policy decisions of central banks worldwide. Building on the Keynesian tradition, New Keynesianism emerged as a response to the challenges faced by traditional Keynesian economics (Blanchard & Galí, 2007). New Keynesians, including economists like Greg Mankiw, emphasised the importance of imperfect competition and nominal rigidities in the economy. They argue that price and wage rigidities can lead to short-term fluctuations in output and employment and that monetary policy can be used to address these issues. New Keynesian models often incorporate microeconomic foundations, providing a more rigorous framework for understanding the transmission mechanisms of monetary policy (Woodford, 2003). Inflation targeting gained prominence in the late 20th century, as central banks sought a clear and transparent framework for conducting monetary policy (Taylor, 1993). Under inflation targeting, central banks set an explicit target for the inflation rate and adjust interest rates to achieve that target. This approach is grounded in the belief that maintaining price stability contributes to overall economic stability. Countries such as Canada and New Zealand were early adopters of inflation targeting, and many others followed suit (Rogoff, 1985). In recent years, Modern Monetary Theory (MMT) has gained attention as an alternative perspective on monetary policy (Wray, 1998). MMT challenges traditional views on government deficits and debt, arguing that as long as a country has its own sovereign currency, it can fund its spending needs without facing solvency constraints. Advocates of MMT contend that governments should focus on achieving full employment and controlling inflation rather than obsessing over deficit reduction. Critics argue that MMT’s dismissal of conventional concerns about government debt may lead to inflationary pressures and undermine fiscal discipline. It is crucial to recognise that monetary policy theories are not one-size-fits-all; their applicability can vary across countries and regions (King, 1994). The independence of central banks is a key aspect of many modern monetary policy frameworks, aiming to shield them from short-term political pressures and to ensure a focus on long-term economic objectives (Blinder et al., 2008). The effectiveness of monetary policy tools can be constrained by the zero lower bound on interest rates, limiting the central bank’s ability to use conventional policy measures during economic downturns (Woodford, 2003). 5 How monetary policy shapes company and business strategies: comparing two crises 3. Methodology The primary objective of this study is to delve into the intricate relationship between monetary policy shifts and their implications for business management and marketing strategies. To achieve this, we posed two central research questions. RQ1: What was the monetary authority’s response to this shock? RQ2: How do shifts in monetary policy influence managerial and marketing decisions in businesses and what strategies can firms adopt to navigate these changes effectively? Given the theoretical nature of the proposed research, we opted for a literature review and documentation approach, a methodology that has proven effective in previous similar studies (Ferreira de Mendonça & Simão Filho, 2007). This research encompasses different aspects, each of which is intended to provide context and depth to the proposed central theme. To develop this knowledge associated with the research area, which is related to a foundational criterion of the European Central Bank (ECB), documents such as monographs are considered to a large extent. Specifically, both monographs and official ECB reports, as well as articles from the Banco de España, are consulted to analyse the financial crisis. Therefore, this research is mainly based on documents from the Banco de España and the ECB’s monthly reports, which are enriched in their annual publications. In addition to official reports, in this work we have used studies published in journals indexed in the Journal Citations Reports and Scopus. To understand the implications of monetary policy decisions from a corporate governance perspective, an extension of the literature was carried out using a structured Boolean search in databases such as Scopus and the JSTOR digital library. This search yielded a multitude of documents, including research articles from various institutions, that have added depth to the analysis. Additionally, we sourced static information from the official websites of the aforementioned institutions and other organisations, including the Economic Commission for Latin America and the Caribbean (ECLAC). This methodological approach (see Figure 1), which combines a traditional bibliographical review with a structured Boolean search, ensures a robust and holistic exploration of the topic, bridging the gap between monetary policy decisions and their real-world implications for business management and marketing. 4. Results 4.1. The European Central Bank (ECB) ensured macroeconomic stability The monetary policy in the euro area has been managed by the ECB since 1999. The ECB’s primary goal is to maintain price stability in the European Union (Abbassi & Linzert, 2012), contributing to higher potential growth and protecting the economy’s savings and wealth. The euro became legal in 2002, when other national currencies were no longer in circulation. As a monetary policymaker, the ECB’s goal is 6Gonzalo Salas Muñoz, et al. to maintain price stability, promote investment and support economic growth (Prats Albentosa, 1993). The monetary policy in the Eurosystem is unique, with 19 national central banks (NCBs) and the ECB pursuing price stability only. Maintaining multiple policies could lead policymakers to deviate from certain objectives, resulting in suboptimal outcomes (Kydland & Prescott, 1977). Given the independent fiscal policies of the 19 countries, it is crucial for NCBs to strengthen their anti-inflationary commitment. The decision to focus on a single target was based on theoretical reasons, as monetary policy has a greater impact on prices than other factors. Although some studies indicate that the velocity of money does not adjust to a constant, this does not invalidate the proposition that the policies implemented by the European Central Bank (ECB) can have a considerable impact on the price level (Cuadrado-Roura et al., 2019). The ECB monitors interest rates, its primary policy instrument, and the monetary aggregate M3. While changes in M3 can affect the rate of change in prices, the effect may be dampened or amplified by fluctuations in the velocity of money circulation. Interest rate changes, which affect market liquidity, lead to price performance variations. To maintain price stability, the European Central Bank (ECB) implements a strategy that incorporates two key requirements. First, definitive and unambiguous definitions based on the harmonised index of consumer prices (HICP) must be established to fix a medium-term inflation target of 2% (Hernández, 2022). Second, Figure 1. Methodological summary Research Questions RQ1: What was the monetary authority’s response to this shock? RQ2: How do shifts in monetary policy influence managerial and marketing decisions in businesses and what strategies can firms adopt to navigate these changes effectively? Foundational Understanding. Financial Crisis Analysis. Primary Research Core. Managerial Implications. Data Enrichment Sources and Sections Incorporates static information from official websites of the mentioned institutions and other relevant organizations. Methodological Approach Combines traditional bibliographical review with modern database searches. Ensures a comprehensive exploration of the topic. Bridges the theoretical aspects with practical implications for business management and marketing. Source: own elaboration from Ishtiaq (2019). 7 How monetary policy shapes company and business strategies: comparing two crises potential factors that could threaten price stability must be assessed using economic analysis indicators to identify inflationary factors and to analyse the international environment to determine how global commercial activity, labour productivity and unemployment are expected to fluctuate. 4.2. The European Central Bank Since the European Central Bank (ECB) was established and commenced its monetary policy operations, the euro area has undergone a period of noteworthy expansion and economic convergence, ranking among the most substantial in the region. In this regard, we delve into the economic conditions preceding the financial crisis to better understand the monetary policy interventions that were implemented, followed by an analysis of the crisis response and the unique features of the subsequent period. 4.2.1. The situation before the 2008 crisis During the pre-financial crisis period (Abbassi & Linzert, 2012), interest rates fluctuated and the inflation rate slightly exceeded the 2% ceiling. Monetary aggregates experienced sustained growth due to increased credit during this period (Banco Central Europeo, 2007). In 2007, the six-month rate of change was higher than the year-on-year growth rate driven by monetary expansion. In particular, the rise in interest rates dampened the growth of magnitude M1 (Salas-Muñoz, 2022), whereas the increase in M3 intensified because of the attractiveness of liquid deposits. This led to a build-up of liquidity, which was partly absorbed by the prices. It is not surprising that differential inflation situations have appeared in the euro area (Banco Central Europeo, 2007). From 1999 to 2001, during the early years of the institution’s operation, monetary policy was contractionary and reflected in an increase in interest rates from 3% to 4.75% (Prats Albentosa, 1993; Salas-Muñoz, 2022). However, from 2001 to 2005, an expansionary policy was implemented to address external issues arising from the technological bubble, known as the dot-com bubble, as well as internal issues related to German reunification and high credit growth in member countries. As a result, interest rates were approximately 2% and economic growth was solid in the winter of 2005. However, the tone of the monetary policy changed due to rising inflation, and in July 2008, just before the financial crisis, the euro area reference rate was 4.25%. Although inflationary pressure existed during the first part of 2008, economic activity indicators did not reflect a weak market (Banco de España, 2008). Therefore, a liquidity injection policy was implemented to fulfil the requirements of credit institutions in the euro area. In September 2008 (Azadinamin, 2016), the failure of Lehman Brothers, a major investment bank in the United States, led to a global economic downturn in several major countries that lasted for several years. 8Gonzalo Salas Muñoz, et al. 4.2.2. The euro area sizes In 2007, the European Central Bank (ECB) initiated the practice of holding longterm liquidity auctions (Salas-Muñoz, 2022) with no restrictions on the quantity of funds that could be auctioned off, and the option to provide liquidity in US dollars was subsequently introduced. However, following the collapse of Lehman Brothers, panic spread rapidly in global financial systems, leading to an increase in the perception of credit risk in the banking sector (Banco de España, 2008). Consequently, unsecured lending activities were significantly reduced and the interbank market, a crucial monetary policy transmitter, ceased to function effectively. In light of these developments, the ECB was compelled to adopt exceptional measures through changes to its operational framework. The ECB’s strategy comprises two primary actions: gradually reducing the benchmark interest rate to 0% and exponentially expanding the balance sheet through unconventional policy measures (Prats Albentosa, 1993). The most noteworthy monetary market reform was the transition from a conventional variable-rate auction system to one featuring fixed rates and full allotments. This system was implemented across a range of auctions, including longer-term refinancing operations (LTROs) (Banco de España, 2008). These actions were taken to ensure the liquidity of financial institutions. The minimum reserve requirement was reduced from 2% to 1%. In addition, the implementation of negative interest rates on deposit facilities encourages banks to maintain ECB liquidity. The utilisation of foreign currency liquidity through swap operations necessitates cooperation with other central banks. Conversely, the ECB implemented measures in the credit sphere through long-term financing operations aimed at stimulating private-sector lending. However, the most significant impact on the ECB’s balance sheet was due to the measures taken in fixed-income markets. The securities markets programme (SMP) was devised between 2010 and 2012 to address financial imbalances in the private and public sectors, particularly in southern European countries experiencing sovereign risk issues. The asset purchase programme (APP) was launched by the ECB in 2015, with the objective of making substantial investments in financial assets, primarily in the public sector. This was achieved by purchasing debt from all euro area Member States and related government agencies (Prats Albentosa, 1993). The implementation of crisis management policies aimed at preserving the euro had a highly positive impact on the Member States. One notable characteristic of the programme was the significant expansion of the European Central Bank’s (ECB) balance sheet, which grew to over four and a half trillion euros by mid-2018, positioning it among the largest central banks in terms of GDP. 4.3. The European Central Bank’s replies The ongoing COVID-19 pandemic has created a critical health situation that requires careful consideration and action by policymakers. While the European Central Bank (ECB) has taken steps to address the pandemic’s impact on the 9 How monetary policy shapes company and business strategies: comparing two crises economy, it is essential to evaluate the economic conditions leading up to the pandemic to provide a comprehensive evaluation of the ECB’s actions and their implications. 4.3.1. The situation before the COVID crisis During the period preceding the health crisis, the euro area was characterised by a protracted spell of low inflation, which prompted the European Central Bank (ECB) to maintain interest rates at near-zero levels and, in certain instances, below zero. This scenario presented significant challenges for implementing a monetary policy based on interest rates, as minimal room for further reduction had been reached. Additionally, ECB experts predicted that market expectations for short-term interest rates would remain low, necessitating reassessment of the strategy and adaptation to evolving circumstances. The inflationary trend was relatively moderate before the onset of the pandemic. In particular, the core inflation remained at 1%. As a consequence, it is evident that the monetary policy implemented by the European Central Bank (ECB) was expansionary in nature, as evidenced by its measures. In specific terms, the deposit facility rate was lowered to -0.50% to increase market liquidity (Aguilar et al., 2020). On a formal note, the European Central Bank (ECB) introduced a fresh set of targeted longer-term refinancing operations (TLTRO-III) to maintain congenial credit conditions. The programme was designed to provide support to banks and encourage lending. Furthermore, the acquisition of both public and private assets was renewed to improve the financing conditions in financial markets (Salas-Muñoz, 2022). As a result of these actions, the euro area experienced historically low interest rates and activated its asset purchase programme (APP) when COVID-19 spread throughout the continent. 4.3.2. Facing different types of crises In 2008 and 2020, both economic crises were rooted in the excessive private sector and household debt caused by the uncontrolled expansion of the speculative mortgage sector. The spark that started the crisis was a complex financial package called CDOs (García Delgado, 2021). Despite these differences, all economic recessions share common traits such as the financial crisis resulting from the private sector and excessive household indebtedness. The decrease in real estate prices and rise in default rates led to a decline in the value of these assets and had a negative impact on the entities involved. 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