Term Structure of Interest Rate Volatility and Macroeconomic Uncertainty ∗

We propose a new model of the yield curve to capture both the dynamics of their conditional mean and the term structure of interest rate volatilities. The new class of affine term structure models exhibits multiple unpriced stochastic volatility factors without imposing constraints on the conditional mean of yields. The common movement in the volatilities extracted from the model provides a new measure of economywide uncertainty, and we use it to study the impact uncertainty has on the macroeconomy. Towards the end of the Great Recession, uncertainty accelerated the zero lower bound for the short term interest rate, added to concerns over deflation, and contributed to higher unemployment rates.