Economic Policy Uncertainty and the Yield Curve

66 Pages Posted: 7 Oct 2015  

Markus Leippold

University of Zurich - Department of Banking and Finance

Felix Matthys


Multiple version iconThere are 2 versions of this paper

Date Written: October 5, 2015


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

Suggested Citation

Leippold, Markus and Matthys, Felix, Economic Policy Uncertainty and the Yield Curve (October 5, 2015). Available at SSRN: or

Markus Leippold

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032

Felix Matthys (Contact Author)

ITAM ( email )

Av. Camino a Sta. Teresa 930
Col. Héroes de Padierna
Mexico City, D.F. 01000, Federal District 01080
+52 155 1394 6562 (Phone)

Register to save articles to
your library


Paper statistics

Abstract Views