The Long-Term Risks to US Financial Markets

Philip Arestis and Elias Karakitsos

Chapter 11 in The Post ‘Great Recession’ US Economy, 2010, pp 273-302 from Palgrave Macmillan

Abstract: Abstract Financial markets link the imbalances of the various sectors of the economy to their spending decisions, which is particularly important in asset-led business cycles. The success or failure of monetary policy to steer the economy out of the asset and debt deflation spiral relies on its ability to affect developments in bond yields, equities and currencies. Chapter 10 dealt with the dollar and this chapter deals with bonds and equities. Bond yields affect the entire spectrum of interest rates from mortgage rates to corporate bond yields that determine housing and fixed investment. Bond yields also affect bank debentures that determine the cost of bank borrowing from capital markets and therefore the availability of bank lending. The bond market shapes the ability of the personal sector to service its debt and the appetite of households to accumulate more debt. This, in combination with the housing market, impacts upon personal sector net wealth and, therefore, on consumption. As we shall see later in this chapter, bond yields also influence equities through the equity risk premium and the pricing of all financial instruments and synthetic products.

Keywords: Monetary Policy; Business Cycle; Central Bank; Yield Curve; Equity Market (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1057/9780230276109_11

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