The choice of deleveraging at the cost of economic and financial instability

In the past, central banks used a stable Taylor rule, with which the real interest rate rises when there is inflation (the nominal interest rate rises more than inflation) and falls when inflation declines. If the real interest rate rises in line with inflation, production and inflation, asset prices are stabilised. But central banks are currently switching to a policy of stabilising the yield curve ( “ yield curve control ” ). If interest rates no longer vary, the real interest rate falls when inflation rises, and rises when inflation falls. This policy ensures deleveraging, but since the real interest rate varies in the opposite direction to inflation, there is a destabilisation of production, inflation and asset prices. The choice of deleveraging by keeping interest rates very low therefore leads to economic and financial instability.