Yield Curve and Financial Uncertainty: Evidence Based on Us Data

23 Pages Posted: 10 Jul 2019 Last revised: 23 Jul 2019

See all articles by Efrem Castelnuovo

Efrem Castelnuovo

University of Melbourne - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: 2019

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, inflation dynamics, output growth

JEL Classification: C220, E320, E520

Suggested Citation

Castelnuovo, Efrem, Yield Curve and Financial Uncertainty: Evidence Based on Us Data (2019). CESifo Working Paper No. 7697. Available at SSRN: https://ssrn.com/abstract=3416870

Efrem Castelnuovo (Contact Author)

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

HOME PAGE: http://https://sites.google.com/site/efremcastelnuovo/home

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