Download this Paper Open PDF in Browser

Oil Shocks and the Zero Bound on Nominal Interest Rates

52 Pages Posted: 14 Nov 2010  

Martin Bodenstein

Board of Governors of the Federal Reserve System

Luca Guerrieri

Federal Reserve Board - Trade and Financial Studies

Christopher J. Gust

Federal Reserve Board - Trade and Financial Studies

Date Written: October 25, 2010

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.

Keywords: Oil Shocks, zero lower bound, DSGE models

JEL Classification: F32, F41

Suggested Citation

Bodenstein, Martin and Guerrieri, Luca and Gust, Christopher J., Oil Shocks and the Zero Bound on Nominal Interest Rates (October 25, 2010). FRB International Finance Discussion Paper No. 1009. Available at SSRN: https://ssrn.com/abstract=1708218 or http://dx.doi.org/10.2139/ssrn.1708218

Martin Bodenstein (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Luca Guerrieri

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2550 (Phone)

Christopher J. Gust

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

Paper statistics

Downloads
26
Abstract Views
290