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There is a lot of research on how the government yield curve can be used to predict the economy. The government yield curve is often seen as a leading indicator. But for which variables is the curve a lagging indicator? In other words, which economic indicators lead the government yield curve?

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In the United States, the Federal Reserve is always late to adjust to rising inflation with an extreme outlier in the mid-1990s.

Inflation always leads the flattening of the yield curve since the Fed raising interest rates which flattens the yield curve is usually in response to rising inflation.

Poorly managed currencies or even the US in the 1970s will distort this phenomenon.

In the absence of a clear monetary control such as the Fed or Hong Kong using the overnight rate to control inflation, the next best criteria is a falling exchange rate like the present situation or East Asia in 1997 as the affected countries place a much higher value on exchange rates than inflation so will only indirectly respond to inflation by trying to maintain a high exchange rate with high interest rates causing an inverted yield curve.

This can help with emerging markets, but they seldom "play by the rules", so that criteria will be less accurate yet still best.

For developed markets such as the US, Europe, Hong Kong, and to a much lesser extent Japan, rising inflation is the early leading indicator, and rising overnight rates is the later indicator.

For completely undeveloped corrupt markets, I have found no correlation.

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