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Yield curve and financial uncertainty: Evidence based on US data

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  • Efrem Castelnuovo

Abstract

How does the yield curve 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 of the entire US yield curve. Both ends of the yield curve respond negatively and significantly. The response of the short end of the yield curve is found to be stronger than that of the long end, i.e., 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," CAMA Working Papers 2019-38, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2019-38
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial uncertainty shocks; yield curve; local projections; inflation dynamics; output growth.;

    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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