The Federal Reserve Board eagle logo links to Board's home page

International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Oil Shocks and the Zero Bound on Nominal Interest Rates
Martin Bodenstein, Luca Guerrieri, and Christopher Gust
2010-1009  (September 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.

Full paper (289 KB PDF) | Full paper (screen reader version)

Oil Shocks, zero lower bound, DSGE models

PDF files: Adobe Acrobat Reader   ZIP files: PKWARE

Home | IFDPs | List of 2010 IFDPs
Accessibility | Contact Us
Last update: October 25, 2010