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Board of Governors of the Federal Reserve System (U.S.)
Finance and Economics Discussion Series
Oil, Equities, and the Zero Lower Bound
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.


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Deepa Dhume Datta & Benjamin K. Johannsen & Hannah Kwon & Robert J. Vigfusson, Oil, Equities, and the Zero Lower Bound, Board of Governors of the Federal Reserve System (U.S.), Finance and Economics Discussion Series 2018-058, 17 Aug 2018.
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Keywords: Equities ; Macroeconomic surprises ; New-keynesian model ; Oil ; Zero lower bound
DOI: 10.17016/FEDS.2018.058
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