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Oil shocks and the zero bound on nominal interest rates

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  • Martin Bodenstein
  • Luca Guerrieri
  • Christopher Gust

Abstract

Beginning in 2009, in many advanced economies, policy rates reached their zero lower bound (ZLB). 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. In fact, if the increase in oil prices is gradual, the persistent rise in inflation can cause a GDP expansion.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 1009.

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Date of creation: 2010
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Handle: RePEc:fip:fedgif:1009

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Keywords: Petroleum products - Prices ; Petroleum industry and trade;

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Cited by:
  1. Luca Guerrieri & Matteo Iacoviello & Raoul Minetti, 2012. "Banks, sovereign debt and the international transmission of business cycles," International Finance Discussion Papers 1067, Board of Governors of the Federal Reserve System (U.S.).
  2. Gust, Christopher & López-Salido, J David & Smith, Matthew E, 2012. "The Empirical Implications of the Interest-Rate Lower Bound," CEPR Discussion Papers 9214, C.E.P.R. Discussion Papers.

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