Contractionary Monetary Policy
Plain definition
Central bank actions that reduce the money supply and raise interest rates to cool an overheating economy and fight inflation.
In economics
Contractionary (tight) monetary policy raises borrowing costs, which dampens consumption and investment, shifting aggregate demand left and easing price pressure. The risk is overshooting into recession and higher unemployment, since rate changes affect the economy with long and variable lags.
Example
With inflation above 8% in 2022, the Fed raised rates eleven times in about a year. Credit-card, auto, and mortgage rates climbed sharply; housing demand cooled, hiring slowed, and inflation fell back toward target, though growth also weakened.
Contractionary monetary policy is confused with austerity (contractionary fiscal policy). Tight money is the central bank raising rates; austerity is the government cutting spending or raising taxes. Both reduce demand, but they are run by different institutions and hit different channels.