What Is a Contractionary Monetary Policy?

Tight monetary policy is a policy tool adopted by the central bank to achieve macroeconomic goals. This monetary policy is a policy of tightening monetary policy when the economy is overheating, aggregate demand is greater than aggregate supply, and inflation occurs in the economy. The central bank will adopt a contractionary monetary policy aimed at increasing interest rates by controlling the money supply, thereby reducing investment and reducing demand. The decline in aggregate demand will tend to balance aggregate supply and aggregate demand and reduce the rate of inflation. ^[1]

Austerity monetary policy

Tight monetary policy is a policy tool adopted by the central bank to achieve macroeconomic goals. This monetary policy is a policy of tightening monetary policy when the economy is overheating, aggregate demand is greater than aggregate supply, and inflation occurs in the economy. The central bank will adopt a contractionary monetary policy aimed at increasing interest rates by controlling the money supply, thereby reducing investment and reducing demand. The decline in aggregate demand will tend to balance aggregate supply and aggregate demand and reduce the rate of inflation. ^[1]

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The main measures adopted in applying monetary policy include seven aspects:

1.Reduce currency issuance

The effect of this measure is that the amount of banknotes will no longer increase.

Monetary policy ^[2]

Specifically, it is mainly reflected in three aspects:

First, the tight monetary policy has not affected the relatively loose capital environment of commercial banks as a whole. Although the central bank has adopted austerity policies such as raising the deposit reserve ratio and open market operations to recover liquidity, the increase in foreign exchange accounts is still greater than the increase in the base currency. The problem of excess liquidity in the banking system is still more prominent. The gold rate is still relatively abundant. Bank credit expansion has ample capital base.

Second, the central bank bill has a crowding-out effect on the growth of bank loans. Although the capital is relatively loose and banks have a strong impulse to lend, the growth of loans has always been lower than the growth of deposits. The deposit-loan gap in the banking system has continued to widen, and the deposit-loan ratio has continued to decline. The holding of central bank bills by commercial banks has a certain crowding-out effect on loans.

Third, to a certain extent, increase the pressure on the use of bank funds. Affected by the crowd-out effect of central bank bills and the further development of stock financing and bond financing in the financial industry, to a certain extent, companies' dependence on bank loans has been reduced. The scale of the gap has been expanding, and the pressure on bank funds has increased.