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Discussion Paper
Is Cheaper Oil Good News or Bad News for U.S. Economy?
Oil prices have declined substantially since the summer of 2014. If these price declines reflect demand shocks, then this would suggest a slowdown in global economic activity. Alternatively, if the declines are driven by supply shocks, then the drop in prices might indicate a forthcoming boost in spending as firms and households benefit from lower energy costs. In this post, we use correlations of oil price changes with a broad array of financial variables to confirm that this recent fall in oil prices has been mostly the result of increased global oil supply. We then use a model to assess ...
Working Paper
Monetary Policy without Moving Interest Rates: The Fed Non-Yield Shock
Existing high-frequency monetary policy shocks explain surprisingly little variation in stock prices and exchange rates around FOMC announcements. Further, both of these asset classes display heightened volatility relative to non-announcement times. We use a heteroskedasticity-based procedure to estimate a “Fed non-yield shock”, which is orthogonal to yield changes and is identified from excess volatility in the S&P 500 and various dollar exchange rates. A positive non-yield shock raises stock prices in the U.S. and around the globe, and depreciates the dollar against all major ...
Working Paper
Financial Stability Considerations for Monetary Policy: Empirical Evidence and Challenges
This paper reviews literature on the empirical relationship between vulnerabilities in the financial system and the macroeconomy, and how monetary policy affects that connection. Financial vulnerabilities build up over time, with both risk appetite and risk taking rising during economic expansions. To some extent, financial crises are predictable and have severe real economic consequences when they occur. Empirically it is difficult to link monetary policy to financial vulnerabilities, in part because financial cycles have long durations, making it difficult to separate effects of changes in ...
Discussion Paper
Lower Oil Prices and U.S. Economic Activity
After a period of stability, oil prices started to decline in mid-2015, and this downward trend continued into early 2016. As we noted in an earlier post, it is important to assess whether these price declines reflect demand shocks or supply shocks, since the two types of shocks have different implications for the U.S. economic outlook. In this post, we again use correlations of weekly oil price changes with a broad array of financial variables to quantify the drivers of oil price movements, finding that the decline since mid-2015 is due to a mix of weaker demand and increased supply. Given ...