Yield Curve Flattening a Symptom of Ineffective Policy Tightening

Victor Xing

MPRA Paper from University Library of Munich, Germany

Abstract: Executive summary: • A flattening yield curve highlights Federal Reserve rate hikes’ inability to tighten financial conditions, as low long-term interest rates continued to induce institutional investors to “reach for yield” by moving up the risk ladder • Central banks initiating “short volatility positions” via QE have dampened long-term sovereign bond yields, which crowded out private capital and induced investors to “find something else to do” by buying more esoteric assets • A flat yield curve alone would only pave the way, rather than directly trigger events that result in recession, as persistently low long-term bond yields increase the probability and magnify the impacts of balance sheet crises • Prolonged easy financial conditions as a result of ineffective tightening is not costless, for uneven wage growth and rapid asset price appreciation have exacerbated inequality to heighten financial, social and political instability

Keywords: Yield curve; monetary policy; balance sheet normalization; quantitative easing (search for similar items in EconPapers)
JEL-codes: E0 E5 G12 (search for similar items in EconPapers)
Date: 2018-01-07
New Economics Papers: this item is included in nep-fmk and nep-mac
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Citations: View citations in EconPapers (1)

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