Oil Shocks and the Zero Bound on Nominal Interest Rates
DIANE Publishing, Apr 1, 2011 - 47 pages
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. The authors 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 theinterest-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. Illus. This is a print on demand report.
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15 Headline Inflation 15 Real 20 Home additively separable preferences aggregate benchmark model Bodenstein budget constraint consumption habits core inflation country’s Current Core Infl denotes depreciation effects of oil elasticity equation Erceg extended model Figure financial frictions firms Guerrieri 2010 higher oil prices home and foreign home country household h household’s implement the zero implies input intermediate investment labor supply Lagrangian multiplier liquidity trap lower bound constraint MBt+1/Pt member of household monetary policy rule monetary policy shocks monopolistic competition nominal interest rate nominal rigidities nonoil consumption oil demand shock oil shocks oil supply shock panels parameter pass-through percent policy rate reaches price of oil prices and wages production real exchange rate Real GDP Real Gross Output Real Interest Rate response rise in inflation rule responds smoothing term staggered contracts stochastic process technology shocks unconstrained zero bound constraint zero lower bound ZLB Binds Home