Tight Money

Abstract

This term, like many others in financial economics, has no single and precise meaning because over the years debate has come inevitably to reflect the complexity of financial realities. But some pointers towards definition may usefully be made. First, the reference is to tightness of the supply of money relative to the demand for it. Recognition of this point, elementary yet easily overlooked in the heat of practical controversy, immediately indicates the problem that tightness/ease is typically difficult to identify – much less to measure – with any confidence. For example, while interest-rate levels are frequently regarded as appropriate indicators, low and/or falling rates can indicate monetary ease if they reflect supply expanding more rapidly than demand, but could reflect tightness if demand has contracted – say because of collapsing sales and profits – so that equilibrium interest rate levels would be lower still.