The impact of term spread volatility on economic activity

Abstract

We examine the impact of the volatility of the US Treasury yield curve slope (term spread volatility) on US economic activity within a VAR framework. Our findings show that a positive shock to term spread volatility leads to a persistent decline in US industrial production. Moreover, our econometric results are the first to demonstrate that term spread volatility absorbs the macroeconomic predictive information contained in the level of the term spread. Finally, the negative effect of term spread volatility remains robust in alternative VAR models, as well when including popular uncertainty proxies such as the VIX and the EPU indexes.