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Government Policy Uncertainty and the Yield Curve


Leippold, Markus; Matthys, Felix (2017). Government Policy Uncertainty and the Yield Curve. SSRN 2664116, University of Zurich.

Abstract

We study the impact of economic policy uncertainty on the term structure of nominal interest rates. We develop a general equilibrium model, in which both the government and the central bank policy decisions are driven by uncertainty shocks. Our affine yield curve model captures both the shape of the interest rate term structure as well as the hump-shape of bond yield volatilities. Our theoretical predictions are strongly supported by the data. Higher economic policy uncertainty leads to a significant decline in yield levels, induces a hump-shaped increase in bond yield volatility, and increases bond risk premia, especially for longer maturities.

Abstract

We study the impact of economic policy uncertainty on the term structure of nominal interest rates. We develop a general equilibrium model, in which both the government and the central bank policy decisions are driven by uncertainty shocks. Our affine yield curve model captures both the shape of the interest rate term structure as well as the hump-shape of bond yield volatilities. Our theoretical predictions are strongly supported by the data. Higher economic policy uncertainty leads to a significant decline in yield levels, induces a hump-shaped increase in bond yield volatility, and increases bond risk premia, especially for longer maturities.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:23 August 2017
Deposited On:18 Jun 2018 08:41
Last Modified:24 Sep 2019 23:31
Series Name:SSRN
Additional Information:Previous version: "Economic Policy Uncertainty and the Yield Curve" (October 2015)
OA Status:Green
Free access at:Official URL. An embargo period may apply.
Official URL:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2664116
Other Identification Number:merlin-id:16296

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