Hello guys, So here we go: actually I would like to clarify this situation; My guts are telling me that the yield curve is flatter when fiscal policy (long term effects) is in contraction and monetary policy (short term effects) is also in contraction because: A) A fiscal policy in contraction means there is less incentives to spend money which means less interest in borrowing money so interest rates are falling on the right side of the yield curve B) A monetary policy in contraction, on the other hand, will just increase interest rates on the left side of the yield curve as the money supply is cut However, according to CFA, its a stimulative fiscal policy + restrictive monetary policy which flatten the yield curve So my questions: which effects of the stimulative fiscal policy are dominant & in the end, lower interest rate & make the yield curve flatter with the effect of the restrictive monetary policy driving up short term interest rate ? Many thanks, Alex
Monetary policy is primary driver for YC and is always dominant related to fiscal policy impact on YC.
I always though fiscal policy was more related to the taxation of an overall economy.
So when you say contraction, then there are more taxes because the want to slow down the economy, and this slow down spending.
Ok I think I jut answered my own question haha.
Hey Flashback & VWJETTY, Thanks for your answers; the issue deals with the fact that YC becomes flatter which means that LT interest rate decrease & ST interest rate increase A) Monetary policy is dominant ok I understand but concerning the fiscal policy, my economic logic is in opposition with CFA logic --> my logic: a restrictive fiscal policy (lower LT interest rates as there are less borrowing because lower consumption / spending ) flatten more the yield curve when monetary policy is restrictive (higher ST interest rate) , than a stimulative fiscal policy (increase interest rate obviously as spending are on the rise, more borrowing , more capital needs,…) Someone to help explain why CFA is once again true although my first feeling is in contradiction? Many thanks
The last post in this link will answer your question:
https://www.analystforum.com/forums/cfa-forums/cfa-level-iii-forum/9992884
Hello Idreesz, Thanks you very much this is perfect now it does make sense; Alex