Economic Policy Uncertainty and the Yield Curve

Abstract We study the impact of economic policy uncertainty on term structure nominal interest rates. In a general equilibrium model populated by an averse agent, we show that political not only affects yield curve and corresponding volatility but also bond risk premia carry premium for uncertainty. Our simultaneously captures both shape hump volatilities, stylized feature is hard to match with theoretical model. gives rise set testable predictions which find strong support in data: Higher leads significant decline levels increases volatilities. Moreover, predicts future short rates has ambiguous effect premia. Finally, (long) maturity respond negatively (positively)