Oil, Equities, and the Zero Lower Bound

90 Pages Posted: 23 Aug 2018 Last revised: 21 Feb 2019

See all articles by Deepa Datta

Deepa Datta

Board of Governors of the Federal Reserve System

Benjamin Kramer Johannsen

Board of Governors of the Federal Reserve System

Hannah Kwon

Independent; NERA Economic Consulting

Robert J. Vigfusson

Federal Reserve Board - Trade and Quantitative Studies

Multiple version iconThere are 2 versions of this paper

Date Written: 2018-08-17

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.

Keywords: Equities, Macroeconomic surprises, New-keynesian model, Oil, Zero lower bound

JEL Classification: F31, F41, E30, E01, C81

Suggested Citation

Datta, Deepa and Johannsen, Benjamin Kramer and Kwon, Hannah and Vigfusson, Robert John, Oil, Equities, and the Zero Lower Bound (2018-08-17). FEDS Working Paper No. 2018-058. Available at SSRN: https://ssrn.com/abstract=3237294 or http://dx.doi.org/10.17016/FEDS.2018.058

Deepa Datta (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

Benjamin Kramer Johannsen

Board of Governors of the Federal Reserve System ( email )

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

Hannah Kwon

Independent

No Address Available

NERA Economic Consulting

50 Main Street, 14th Floor
White Plains, NY 10606
United States

Robert John Vigfusson

Federal Reserve Board - Trade and Quantitative Studies ( email )

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

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