What shape does the yield curve take under loose monetary and tight fiscal policy?

Under loose monetary policy and tight fiscal policy, the yield curve typically becomes flatter but still upward facing. Loose monetary policy, often characterized by lower interest rates and increased money supply, encourages borrowing and spending, which can stimulate economic growth. This environment often leads to a relatively gradual increase in yields across different maturities, as investors expect some growth but still maintain caution due to restrictive fiscal measures.

Tight fiscal policy, on the other hand, usually involves higher taxes or lower government spending, which can slow down economic growth. This may result in lower long-term interest rates, even as short-term rates remain influenced by the monetary policy stance. Consequently, the combined effects of loose monetary policy supporting growth expectations with the dampening impact of tight fiscal policy lead to a yield curve that is still upward sloping but less steep than it would be under less restrictive fiscal conditions.

In scenarios where fiscal policy is tight, investors may anticipate lower growth in the future, which dampens long-term yield increases, hence the curve flattens but does not invert, reflecting a balance between the stimulative effects of monetary policy and the restrictive nature of fiscal measures.