Economic Policy Uncertainty and the Yield Curve

Markus Leippold and Felix Matthys
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Markus Leippold: University of Zurich; Swiss Finance Institute
Felix Matthys: ITAM

No 22-36, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper analyzes the impact of economic policy uncertainty on the term structure of real and nominal interest rates. We derive a general equilibrium model where the real side of the economy is driven by government policy uncertainty and the central bank sets money supply endogenously following a Taylor rule. We analyze the impact of government and monetary policy uncertainty on nominal yields, short rates, bond risk premia and the term structure of bond yield volatility. Furthermore, we show that our standard affine yield curve model is able to capture both, the shape of the term structure of interest rates as well as the hump-shaped bond yield volatility curve. Finally, the empirical analysis shows that, whereas higher government policy uncertainty leads to a decline in yields, and an increase in bond yield volatility, monetary policy uncertainty does not have a significant contemporaneous effect on movements in the yield or volatility but is however an important predictor for bond risk premia.

Keywords: Term structure modeling; yield volatility curve; policy uncertainty; bond risk premia (search for similar items in EconPapers)
Pages: 68 pages
Date: 2022-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2236

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