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Oil shocks and the zero bound on nominal interest rates

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  • Bodenstein, Martin
  • Guerrieri, Luca
  • Gust, Christopher J.

Abstract

Beginning in 2008, in many advanced economies, policy rates reached their zero lower bound (ZLB) and almost at the same time, oil prices started rising again. We analyze how the ZLB affects the propagation of oil shocks. As these shocks move inflation and output in opposite directions, their effects on economic activity are cushioned when monetary policy is constrained. The burst of inflation from an oil price increase lowers real interest rates at the ZLB and stimulates the interest-sensitive component of GDP, offsetting the usual contractionary effects. We show that the mitigation of the output decline from the zero lower bound depends on the source of the shock and on the persistence that alternative shocks induce in the price of oil.

Suggested Citation

  • Bodenstein, Martin & Guerrieri, Luca & Gust, Christopher J., 2013. "Oil shocks and the zero bound on nominal interest rates," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 941-967.
    • Handle: RePEc:eee:jimfin:v:32:y:2013:i:c:p:941-967
    DOI: 10.1016/j.jimonfin.2012.08.002
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    More about this item

    Keywords

    Oil shocks; Zero lower bound; DSGE models;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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