Oil, equities, and the zero lower bound

Paper produced as part of the BIS Consultative Council for the Americas Research Network project "The commodity cycle: macroeconomic and financial stability implications"

Since 2008, oil and equity returns have moved together much more than they did previously. In addition, we show that both oil and equity returns have become more responsive to macroeconomic news. Before 2008, there is little evidence that oil returns were responsive to macroeconomic news. We argue that these results are consistent with a new-Keynesian model that includes oil and incorporates the zero lower bound on nominal interest rates. Our empirical findings lend support the model's implication that different rules apply at the zero lower bound.