Yield Curve and Financial Uncertainty: Evidence Based on US Data

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.