In theory, central banks have two instruments: The overall level of interest rates and the slope of the yield curve

In contemporary economies, central banks control short-term interest rates and can also use bond purchases (quantitative easing) to control the slope of the yield curve (quantitative easing is equivalent to replacing long-term financing with short-term financing of the fiscal deficit). Central banks therefore have two instruments: the general level of interest rates (equivalently, the short-term interest rate) and the slope of the yield curve. First, this explains the disappearance of the correlation between the yield curve slope and future growth, since the yield curve slope is controlled. In theory, this enables central banks to conduct “subtle” policies: for example, to fight inflation by raising short-term interest rates (to curb short-term lending and consumption) while avoiding curbing investment and triggering a debt crisis by keeping long-term interest rates low (by inverting the yield curve). However, it should be noted that this possibility is limited in practice, especially in Europe, by the effect that this policy would have on banks: a n inversion of the yield curve has very negative effects on banks’ profitability and therefore on their ability to finance the economy.