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Yield Curve Flattening a Symptom of Ineffective Policy Tightening

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  • Xing, Victor

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

Suggested Citation

  • Xing, Victor, 2018. "Yield Curve Flattening a Symptom of Ineffective Policy Tightening," MPRA Paper 84471, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:84471
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    Keywords

    Yield curve; monetary policy; balance sheet normalization; quantitative easing;

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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