We analyze an estimated stochastic general equilibrium model that replicates key
macroeconomic and financial stylized facts during the Great Moderation of 1983-2007.
Our model predicts a sizeable and volatile nominal term premium - comparable to
recent reduced-form empirical estimates - with real risk two times more important
than inflation risk for the average nominal term premia. The model enables us to
address salient questions about the effects of monetary policy on the term structure of
interest rates. We find that monetary policy shocks can have differing effects on risk
premia. Actions by the monetary authority with a persistent effect on households'
expectations have substantial effects on nominal and real risk premia. Our model
rationalizes many of the opposing findings on the effects of monetary policy on term
premia in the empirical literature.
DSGE model, Bayesian estimation, Term structure, Monetary policy