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Yield Curve and Financial Uncertainty: Evidence Based on US Data

Efrem Castelnuovo ()

No 234, "Marco Fanno" Working Papers from Dipartimento di Scienze Economiche "Marco Fanno"

Abstract: How do short and long term interest rates respond to a jump in financial uncertainty? We address this question by conducting a local projections analysis with US monthly data, period: 1962-2018. The state-of-the-art financial uncertainty measure proposed by Ludvigson, Ma, and Ng (2019) is found to predict movements in interest rates at different maturities. In particular, an increase in financial uncertainty is found to trigger a negative and significant response of both short and long term interest rates. The response of the short end of the yield curve (i.e., of short term interest rates) is found to be stronger than that of the long end (i.e., of long term ones). In other words, a financial uncertainty shock causes a temporary steepening of the yield curve. This result is consistent, among other interpretations, with medium-term expectations of a recovery in real activity after a financial uncertainty shock.

Keywords: financial uncertainty shocks; yield curve; local projections; in‡flation dynamics; output growth (search for similar items in EconPapers)
JEL-codes: C22 E32 E52 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2019-06
New Economics Papers: this item is included in nep-mac
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Working Paper: Yield Curve and Financial Uncertainty: Evidence Based on US Data (2019) Downloads
Working Paper: Yield curve and financial uncertainty: Evidence based on US data (2019) Downloads
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