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Monetary liquidity spillovers across countries could have serious implications for
central banks and national macroeconomic and financial variables as well. For example,
monetary liquidity spillovers may lead to a global cycle in house prices. The same could
be true for a common pattern in inflation and share prices.
According to Lane and Milesi-Ferretti (2007), the dramatic increase in
international financial integration has been one of the salient global economic
developments in recent years. Countries have accumulated substantial cross-border
holdings and there have been sizable shifts in the composition of asset and liability
positions. The size of countries’ external portfolios is now such that fluctuations in
exchange rates and asset prices cause very significant reallocations of wealth across
countries. This creates a huge potential for international capital flows, thereby influencing
monetary conditions in other countries as well. We now briefly address our concept of a
"global short-term interest rate".
Of course, there is no world central bank which sets the short-term interest rate for
many countries. However, from this quite trivial insight, it cannot be concluded that
interest rate shocks cannot be identified on a global level. If a global cycle exists in the
world economy and in housing markets, the money market rates should move
synchronously as well, since national monetary policies react directly or indirectly to
global developments: directly, in the sense that global variables enter the central bank’s
reaction function (via world GDP and/or global excess liquidity); indirectly, if monetary
policy does not react until global variables have an effect on national patterns (global
excess liquidity spills over into national monetary aggregates). Our "global interest rate
shocks" can then be interpreted as unexpected changes in this reaction pattern. In the
literature, common beliefs and peer pressure are mentioned as additional reasons for a
similar reaction pattern of central banks, i.e. national monetary policies react quite
similarly across borders via meetings and the exchange of information among central
banks (implicit policy coordination). For example, the establishment of inflation targeting
regimes in the majority of industrialized countries might serve as an example of
"common beliefs" in this respect.