the yield curve is important mainly for two reasons. first, it is an indicator of what the market is thinking about the expected path of future monetary policy. this follows because long - term rates under certain conditions reflect expectations of the future path of short - term rates. of course, besides future rate expectations, longer maturity yields typically contain risk premia. the quantification of these premia is not without challenges even in normal times. rudebusch, g. and j. williams, ( 2009 ), “ forecasting recessions : the puzzle of the enduring power of the yield curve ”, journal of business & economic statistics, american statistical association, vol. 27 ( 4 ). chinn, m. and k. kucko, ( 2014 ) “ the predictive power of the yield curve across countries and time ”, mimeo available at http : / / www. ssc. wisc. edu / ~ mchinn / chinn _ kucko _ feb2014. pdf bis central bankers ’ speeches the second reason results from the yield curve being a key part of the transmission mechanism of monetary policy. therefore, it is something the central bank wants to influence, not only just learn from. in particular, while the first step in the transmission process of monetary policy is typically related to very short - term interbank interest rates, the wider transmission requires that these effects spread more widely to medium - and longerterm rates. in the next step, the monetary policy impulse spreads to the pricing of assets that are relevant for the financing conditions of households and corporations, their consumption, production and investment decisions and, finally, inflation. the impact of the crisis naturally, the crisis has brought up a number of challenges for our understanding of the yield curve. for example, credit and liquidity premia have been important drivers of sovereign yields in the euro area and elsewhere, thereby complicating the process of inferring market expectations of the future path of policy, and also impairing the transmission mechanism of monetary policy to the wider economy. moreover, high sovereign spreads in the euro area have raised the question of what is the appropriate yield curve to monitor. in an article in the july monthly bulletin we discussed this issue in the context of measuring the euro area riskfree rate. should we use bund yields, euro area average aaa rates or ois rates, or does it depend on the matter at hand? incidentally, an intriguing question in a currency union is the

following : if it is difficult to identify a risk - free rate in a currency union, this means that there is no risk - free asset either, besides the central bank ’ s own liabilities, the currency. whether this peculiar situation adds to the challenges facing the central bank of a monetary union, in terms of signal - extraction and analysis of expectations, i leave to you as a topic for reflection. the crisis has also proved the important role that central banks play in influencing the yield curve through both their conventional and unconventional policies ; including forward guidance, asset purchases and enhanced credit support. this raises a host of questions about the relative effectiveness of these policies, but also about conventional yield curve models and whether they adequately capture the mechanisms that explain the role of these policies, particularly given that for tractability and simplicity real - world complications like credit and liquidity premia, pricing anomalies and even the influence of the macro economy and monetary policy are often not directly considered. it is well known that during decades the fields of finance and macroeconomics dealt with interest rates, asset prices and the yield curve in a total different way and without much interaction. as diebold and rudebusch point out in their book published last year on “ yield curve modelling and forecasting ” : 3 “ in macro models, the entire financial sector is often represented by a single interest rate with no accounting for credit or liquidity risk and no role for financial intermediation or financial frictions. similarly, finance models often focus on the consistency of asset prices across markets with little regard for underlying macroeconomic fundamentals. to understand important aspects of the recent financial crisis … a joint macrofinance perspective is likely necessary ”. the macro - finance approach to the analysis of the yield curve had several developments even before the crisis. in 2006, hordahl, tristani and vestin, 4 ( the last two, ecb diebold, f. x. and g. rudebusch, ( 2013 ), “ yield curve modelling and forecasting : the dynamic nelson - siegel approach ”, princeton university press. hordahl p., o. tristani and d. vestin, ( 2006 ), “ a joint econometric model of macroeconomic and term structure dynamics ”, journal of econometrics, 131. see also by the same authors ( 2008 ), “ the yield curve and macroeconomic dynamics ”, economic journal, royal economic society, vol. 118 ( 533 ). bis