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Yield Curve and Financial Uncertainty: Evidence Based on US Data

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  • Efrem Castelnuovo

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.

Suggested Citation

  • Efrem Castelnuovo, 2019. "Yield Curve and Financial Uncertainty: Evidence Based on US Data," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 52(3), pages 323-335, September.
    • Handle: RePEc:bla:ausecr:v:52:y:2019:i:3:p:323-335
    DOI: 10.1111/1467-8462.12341
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    Cited by:

    1. Johnson Worlanyo Ahiadorme, 2022. "On the aggregate effects of global uncertainty: Evidence from an emerging economy," South African Journal of Economics, Economic Society of South Africa, vol. 90(3), pages 390-407, September.
    2. Aymeric Ortmans & Fabien Tripier, 2020. "COVID-Induced Sovereign Risk in the Euro Area: When Did the ECB Stop the Contagion?," Working Papers 2020-11, CEPII research center.
    3. Moench, Emanuel & Soofi-Siavash, Soroosh, 2022. "What moves treasury yields?," Journal of Financial Economics, Elsevier, vol. 146(3), pages 1016-1043.
    4. Wen, Jun & Zhao, Xinxin & Fu, Qiang & Chang, Chun-Ping, 2023. "The impact of financial risk on green innovation: Global evidence," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    5. Efrem Castelnuovo, 2023. "Uncertainty before and during COVID‐19: A survey," Journal of Economic Surveys, Wiley Blackwell, vol. 37(3), pages 821-864, July.
    6. Shang, Fei, 2022. "The effect of uncertainty on the sensitivity of the yield curve to monetary policy surprises," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).
    7. Ortmans, Aymeric & Tripier, Fabien, 2021. "COVID-induced sovereign risk in the euro area: When did the ECB stop the spread?," European Economic Review, Elsevier, vol. 137(C).
    8. Miguel Ángel Echarte Fernández & Sergio Luis Náñez Alonso & Javier Jorge-Vázquez & Ricardo Francisco Reier Forradellas, 2021. "Central Banks’ Monetary Policy in the Face of the COVID-19 Economic Crisis: Monetary Stimulus and the Emergence of CBDCs," Sustainability, MDPI, vol. 13(8), pages 1-18, April.
    9. Cross, Jamie L. & Hoogerheide, Lennart & Labonne, Paul & van Dijk, Herman K., 2024. "Bayesian mode inference for discrete distributions in economics and finance," Economics Letters, Elsevier, vol. 235(C).

    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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