Do Long Term Interest Rates Drive GDP and Inflation in Small Open Economies? Evidence from Poland

I show that the long term interest rate that includes a time-varying term premium stabilizes GDP and it does not affect significantly inflation volatility in Poland. I derive this result from an estimated DSGE model of a small open economy. GDP volatility would have been much higher if the endogenous part of the term premium had been switched off in the model, while the inflation volatility has not been affected by the presence of the term premium. At the same time, the term premium shock had only a minor impact on GDP and inflation volatilities which suggests that the QE programs conducted by the major central banks did not have a substantial impact on the Polish economy