(Un)expected monetary policy shocks and term premia

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. 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 can have sizeable and differing effects on nominal and real risk premia, rationalizing many opposing findings in the empirical literature.