Monetary Policy Uncertainty and Economic Fluctuations ∗

Uncertainty associated with the monetary policy transmission mechanism is a key driving force of business cycles. To investigate this link, we propose a new term struc-ture model that allows the volatility of the yield curve to interact with macroeconomic indicators. The data favors a model with two volatility factors, that capture short-term and long-term monetary policy uncertainty. Increases in either of them lead higher unemployment rates, but they interact with inflation in opposite directions