Tight Money Market

Tight Money Market Definition

A tight money market is an economic environment where it is onerous and expensive to borrow short-to-medium term money, resulting in reduced borrowing and spending.

Explanation

Tight money markets are typically the result of action taken by a country’s central bank in an effort to curb spending and subside the risk of impending or current inflation. A central bank’s primary tool for implementing tight money markets is increasing of short term interest rates via the “discount rate” (otherwise known as the “fed funds rate”).

Central banks can also use selling of government assets and securities on the open market in an attempt to accomplish the goal of creating tight money markets. This in turn reduces the amount of currency in circulation (reduction of effective money supply), and therefore creates a less attractive environment for prolific borrowing and spending.

 

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