I show that the long term interest rate that includes a time-varying term premium
stabilizes the business cycle in a small open economy (SOE). I derive this result from
the DSGE model of the SOE in which the term premium may 
uctuate because of 1)
the endogenous mechanism that relies on changes in the external debt and 2) exogenous
factors e.g. QE policy in main advanced economies represented by a term premium
shock. I estimate this model with the Polish data and show that the GDP volatility
would have been much higher if the endogenous part of the term premium had been
switched o. At the same time the term premium shock had a minor impact on
the GDP and in
ation volatilities which suggests, among others, that QE programs
conducted by the major central banks did not have a substantial impact on Polish
economy. Finally, I show that by including endogenous mechanism in the term premium
I substantially improve model t to the data as compared with the model that includes
only the exogenous term premium.