<p>One of the consequences caused by high inflation is lower economic growth.</p>
<p>The central bank, by contractionary monetary policy, increases interest rates in order to decrease aggregate demand and lower inflation rates. However this leads to lower economic growth.</p>
<p>Is this not a paradox to lower economic growth in the first place by contractionary monetary policy in order to tame inflation so as to avoid its consequences in the future (which is again lower economic growth?)</p>
<p>Potential explanation: the effect of lower economic growth caused by contractionary monetary policy is smaller compared to the negative effect of high inflation rates on economic growth in the future.</p>

CC BY-SA 4.0
2022-09-28T09:46:30.560Z
Yes, that's roughly the trade-off central banks are currently trying to achieve.
BrsG
CC BY-SA 4.0
2022-09-29T19:24:13.733Z
Now this is a particularly relevant topic because usually you get inflation from excessive growth of the economy and phases of market euphoria. Yet, here we're observing a supply shock, that shifts on the left supply: if you contract the economy further may amplify companies failure rate having catastrophic effects on the economy. I wonder why we don't read about what it's coming on journals...
KArrow'sBest
<economic-growth><money><price><demand><policy>
Contractionary monetary policy to tame inflation. Paradox?
user42354
# Contractionary monetary policy to tame inflation. Paradox?

(Asked by: username_0 on 2022-09-28)

One of the consequences caused by high inflation is lower economic growth.

The central bank, by contractionary monetary policy, increases interest rates in order to decrease aggregate demand and lower inflation rates. However this leads to lower economic growth.

Is this not a paradox to lower economic growth in the first place by contractionary monetary policy in order to tame inflation so as to avoid its consequences in the future (which is again lower economic growth?)

Potential explanation: the effect of lower economic growth caused by contractionary monetary policy is smaller compared to the negative effect of high inflation rates on economic growth in the future.

**Tags:** economic-growth, money, price, demand, policy

> **Comments:**
> **username_1**: Yes, that's roughly the trade-off central banks are currently trying to achieve.  
> **username_2**: Now this is a particularly relevant topic because usually you get inflation from excessive growth of the economy and phases of market euphoria. Yet, here we're observing a supply shock, that shifts on the left supply: if you contract the economy further may amplify companies failure rate having catastrophic effects on the economy. I wonder why we don't read about what it's coming on journals...  

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## 0 answers

