How Do Monetary Policy Rules Affect Term Premia?

This paper derives analytical solutions for interest rate term structures in a new Keynesian framework. Theoretically, we consider the conditions for the positive average slope of nominal term structure, and show that the slope of a real one is positive. We then calibrate the model to find the following results. First, term premia represents compensation for risk of time-variation in IS shock rather than cost-push and monetary policy shocks. Second, a small slope of the Phillips curve is needed for a positive slope of the term structure. Third, the term structure of the inflation premium is downward on average. Finally, a less aggressive response to output gap in the monetary policy rule leads to lower term premia. The implication for the recent low long rate is also discussed.