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Oil, Equities, and the Zero Lower Bound

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  • Deepa Dhume Datta
  • Benjamin K. Johannsen
  • Hannah Kwon
  • Robert J. Vigfusson

Abstract

From late 2008 to 2017, oil and equity returns were more positively correlated than in other periods. In addition, we show that both oil and equity returns became more responsive to macroeconomic news. We provide empirical evidence and theoretical justification that these changes resulted from nominal interest rates being constrained by the zero lower bound (ZLB). Although the ZLB alters the economic environment in theory, supportive empirical evidence has been lacking. Our paper provides clear evidence of the ZLB altering the economic environment, with implications for the effectiveness of fiscal and monetary policy.

Suggested Citation

  • Deepa Dhume Datta & Benjamin K. Johannsen & Hannah Kwon & Robert J. Vigfusson, 2018. "Oil, Equities, and the Zero Lower Bound," Finance and Economics Discussion Series 2018-058, Board of Governors of the Federal Reserve System (US).
  • Handle: RePEc:fip:fedgfe:2018-58
    DOI: 10.17016/FEDS.2018.058
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    File URL: https://www.federalreserve.gov/econres/feds/files/2018058pap.pdf
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    Cited by:

    1. Bao H. NGUYEN & OKIMOTO Tatsuyoshi & Trung Duc TRAN, 2019. "Uncertainty-Dependent and Sign-Dependent Effects of Oil Market Shocks," Discussion papers 19042, Research Institute of Economy, Trade and Industry (RIETI).

    More about this item

    Keywords

    Equities ; Macroeconomic surprises ; New-keynesian model ; Oil ; Zero lower bound;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access

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