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.
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