Oil, Equities, and the Zero Lower Bound

Datta, Deepa Dhume; Johannsen, Benjamin K.; Kwon, Hannah; Vigfusson, Robert J.

doi:10.17016/feds.2018.058

Cited by 17 publications

(12 citation statements)

References 29 publications

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“…10 This evidence suggests that there cannot be indirect feedback from exogenous exchange 10 Fratzscher et al (2014) confirmed these results using more recent data. Datta et al (2019), using a much smaller set of U.S. macroeconomic news than Kilian and Vega (2011) and restricting attention to the response of the price of oil to these news within the same day, show that during the six years when the zero-lower bound was binding, two of twelve news variables had a much larger effect on the price of oil than reported in Kilian and Vega (2011). Unlike Kilian and Vega (2011), however, Datta et al do not report data-mining robust p-values, making it impossible to judge the statistical significance of their estimates, and the 2 R of their regression including all twelve predictors is only 3%, so the extent of the feedback appears negligible even during the zero-lower bound period.…”

Section: Restrictions On the Feedback From Real Interest Rate And Reamentioning

confidence: 99%

Oil Prices, Exchange Rates and Interest Rates

Kilian¹,

Zhou²

2019

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There has been much interest in the relationship between the price of crude oil, the value of the U.S. dollar, and the U.S. interest rate since the 1980s. For example, the sustained surge in the real price of oil in the 2000s is often attributed to the declining real value of the U.S. dollar as well as low U.S. real interest rates, along with a surge in global real economic activity. Quantifying these effects one at a time is difficult not only because of the close relationship between the interest rate and the exchange rate, but also because demand and supply shocks in the oil market in turn may affect the real value of the dollar and real interest rates. We propose a novel identification strategy for disentangling the causal effects of traditional oil demand and oil supply shocks from the effects of exogenous variation in the U.S. real interest rate and in the real value of the U.S. dollar. We empirically evaluate popular views about the role of exogenous real exchange rate shocks in driving the real price of oil, and we examine the extent to which shocks in the global oil market drive the U.S. real exchange rate and U.S. real interest rates. Our evidence for the first time provides direct empirical support for theoretical models of the link between these variables.JEL codes: E43, F31, F41, Q43

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Section: Restrictions On the Feedback From Real Interest Rate And Reamentioning

confidence: 99%

Oil Prices, Exchange Rates and Interest Rates

Kilian¹,

Zhou²

2019

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“…3 In this spirit, Wieland (2017) rejects the liquidity trap hypothesis by showing that negative productivity shocks (earthquakes, oil price shocks) are contractionary even at the zero lower bound. In contrast, Datta et al (2017) find strong co-movements between oil and equity returns at the zero lower bound, which is supportive of the liquidity trap hypothesis. Even if the issue is not yet empirically settled, it remains that the impact of supply shocks at the zero lower bound provides a clean test of the feedback loop described in Chart 1.…”

Section: Low Future Inflationmentioning

confidence: 51%

Is the Study of Business-Cycle Fluctuations “Scientific?”

Challe¹

2019

Revue De l'OFCE

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The study of macroeconomic fluctuations assumes that the behavior of the whole (aggregates) cannot be reduced to the sum of the parts (agents, markets). This is because interdependencies between markets can substantially amplify, or on the contrary dampen, shocks that at any time disturb the equilibrium. The understanding of general-equilibrium effects, on which direct evidence is limited, which are empirically blurred by multiple potential confounding factors, and for which controlled experiments are almost impossible to design, is necessarily more conjectural than the study of individual behavior or of a specific market. However, ignoring these effects because they do not have the same degree of empirical certainty as a directly observed microeconomic effect can lead to serious policy mistakes.

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“…Our contribution relative to all these papers is to introduce the ZLB and to focus on the recent changes since the Great Recession started. The contemporaneous studies by Nakata and Tanaka (2016), Datta et al (2018), and Bilal (2017) are also closely related, with a somewhat similar message but differences in empirical work and theoretical model.…”

Section: Related Literaturementioning

confidence: 86%

Risk Premia at the ZLB: A Macroeconomic Interpretation

Gourio¹,

Ngo²

2020

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Historically, inflation is negatively correlated with stock returns, leading investors to fear inflation. We document using a variety of measures that this association became positive in the U.S. during the 2008-2015 period. We then show how an off-the-shelf New Keynesian model can reproduce this change of association due to the binding zero lower bound (ZLB) on short-term nominal interest rates during this period: in the model, demand shocks become more important when the ZLB binds because the central bank cannot respond as effectively as when interest rates are positive. This changing correlation in turn reduces the term premium, and hence contributes to explaining the decline in long-term interest rates. We use the model to evaluate this mechanism quantitatively. Our results shed light on the validity of the New Keynesian ZLB model, a cornerstone of modern macroeconomic theory.

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Oil, Equities, and the Zero Lower Bound

Cited by 17 publications

References 29 publications

Oil Prices, Exchange Rates and Interest Rates

Oil Prices, Exchange Rates and Interest Rates

Is the Study of Business-Cycle Fluctuations “Scientific?”

Risk Premia at the ZLB: A Macroeconomic Interpretation

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