Finance and Economics Discussion Series (FEDS)

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August 2018

Oil, Equities, and the Zero Lower Bound

Deepa Datta, Benjamin K. Johannsen, Hannah Kwon, and 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.
Acessible materials (.zip)

Keywords: Equities, Macroeconomic Surprises, New-Keynesian Model, Oil, Zero Lower Bound

DOI: https://doi.org/10.17016/FEDS.2018.058

PDF: Full Paper

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Last Update: January 09, 2020