Global Demand Spillovers Near the Zero Lower Bound

Abstract

This paper takes a multi-country perspective to address several challenges in estimating the effects of recessionary shocks when interest rates are low and near the zero lower bound (ZLB). Using panel, time-series, and non-linear VAR techniques, country-specific adjustments to global demand pressures are estimated across 17 advanced economies, where global demand pressures are recovered from a factor decomposition on world commodity prices. Global demand spillovers to domestic real output and stock markets are found to be state-dependent, increasing substantially near the ZLB. A drop in global demand near the ZLB also leads to higher domestic real interest rates as conventional policy cannot sufficiently accommodate ensuing deflation. While this suggests the relevance of shock magnification near the ZLB, additional evidence points toward the offsetting potential of unconventional monetary policy.