Economic Policy Uncertainty and the Yield Curve

Abstract

We study the impact of economic policy uncertainty on the term structure of nominal interest rates. In a general equilibrium model populated by an uncertainty-averse agent, we show that political uncertainty not only affects the yield curve and the corresponding volatility term structure but also bond risk premia carry a premium for political uncertainty. Our model simultaneously captures both the shape of the yield curve and the hump shape of yield volatilities, a stylized feature that is hard to match with a theoretical model. Our m Show more