The shape of the yield curve has traditionally been a key indicator of the macroeconomic outlook. However, the ongoing financial crisis has created several challenges for the conduct of monetary policy, one of which has demanded whole-scale revision of the way that policy-makers model longer term interest rates. This volume brings together central bank economists and leading academic monetary economists to propose new methods for modelling the behaviour of interest rates. Topics covered include: the analysis and extraction of expectations of future monetary policy and inflation; the analysis of the short-term dynamics of money market interest rates; the reliability of existing models in periods of extreme market volatility and how to adjust them accordingly; and the role of government debt and deficits in affecting sovereign bond yields and spreads. This book will interest financial researchers and practitioners as well as academic and central bank economists.

Preface
1. Editors’ introduction Jagjit S. Chadha, Alain C. J. Durré, Michael A. S. Joyce and Lucio Sarno
Part I. Keynote Address:
2. Is the long-term interest rate a policy victim, a policy variable or a policy lodestar? Philip Turner
3. Sovereign debt and monetary policy in theory and practice: the case of the euro area Alain Durré and Frank Smets
4. The Federal Reserve’s response to the financial crisis: what it did and what it should have done Daniel L. Thornton
5. Tail risks and contract design from a financial stability perspective Patrik Edsparr and Paul Fisher
Part II. New Techniques:
6. Compound auto-regressive processes and defaultable bond pricing Alain Monfort and Jean-Paul Renne
7. Yield curve dimensionality when short rates are near the zero lower bound James M. Steeley
8. The intelligible factor model: international comparison and stylized facts Yvan Lengwiler and Carlos Lenz
9. Estimating the policy rule from money market rates when target rate changes are lumpy Jean-Sébastien Fontaine
10. Developing a practical yield curve model: an odyssey M. A. H. Dempster, Jack Evans and Elena Medova
Part III. Policy:
11. The repo and federal funds markets before, during, and emerging from the financial crisis Morten Bech, Elizabeth Klee and Viktors Stebunovs
12. Believe it or not: Taylor rule uncertainty Andrea Buraschi, Andrea Carnelli and Paul Whelan
Part IV. Estimating Inflation Risk:
13. Inflation compensation and inflation risk premia in the euro area term structure of interest rates Thomas Werner and Juan Angel Garcia
14. The predictive content of the yield curve for inflation Hans Dewachter, Leonardo Iania and Marco Lyrio
15. Surprises in the euro area and in the United States term structures Marcello Pericoli
Part V. Default Risk:
16. European sovereign yield spreads in a Gaussian macro-finance term structure model environment Priscilla Burity, Marcelo Medeiros and Luciano Vereda
17. Some considerations on debt and interest rates Luigi Marattin, Paolo Paesani and Simone Salotti
Index.