The effect of Economic Policy Uncertainty on the Spanish bond yield

Abstract

Economic Policy Uncertainty has been given particular attention since the financial crisis in 2007. This paper studies the influence of Economic Policy Uncertainty on the Spanish 10-year bond yield. Under the assumption that the yield on public debt is a representative factor of the health of an economy, reflecting the confidence of a country´s investors, the uncertainty generated by fiscal, regulatory and monetary policy-makers should affect investors´ confidence and, therefore, shows tangible effects on the yields of these bonds. By using a sample from January 2001 to May 2020, it can be seen that Economic Policy Uncertainty has positive and significant impacts on the profitability of the Spanish bond, showing that a country´s Economic Policy Uncertainty reduces its investors´ confidence in the economy, leading to a demand for greater profitability to compensate for the perceived risk. The findings show the need for greater control of Economic Policy Uncertainty to avoid its consequences on the economy.