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and fiscal policy exist. Second, deriving the impact of global shocks on national variables
is rather costly in terms of degrees of freedom. Since our SFAVAR contains seven factors
and seven national variables with two lags each, 30 parameters (including a constant and
a deterministic component) have to be estimated per equation. Bagliano and Morana
(2009) estimate a total of even 43 coefficients by using a sample (only) ranging from Q1
1980 to Q2 2005.
In the following, we focus on the effects of global money supply (or what we
label “global liquidity shocks”) on national variables. As has been the case before, we
bootstrap the confidence bands on the basis of a residual bootstrap with 500 draws.
Accordingly, global liquidity disturbances have a significant impact on broad national
monetary aggregates in the US, the EMU and Canada. However, the effects differ,
thereby indicating that various national transmission mechanisms are at work. In the UK
and Japan no significant impact of global liquidity shocks on national money supplies can
be found.
Global liquidity shocks also trigger significant responses of other major
macroeconomic variables in some countries, like real GDP, consumer prices, house
prices and short term interest rates. A detailed overview on a country level is included in
Table A2 in the Appendix. For example, real GDP in the euro area reacts positively after
a time lag of seven quarters. In order to get a yardstick, we derive the response of EMU
GDP after a structural idiosyncratic money supply shock as well. The impulse response
function displays a rather similar dynamic but is somewhat more pronounced in its
impact on real GDP. House prices in the US are strongly affected by global liquidity
shocks, whereas national money supply disturbances play a comparatively small role.
Hence, we suspect that the bubble in the US residential property market in recent years
can not only be explained by exceptionally low short term and long term interest rates but
by excessive global liquidity as well. Interestingly, global liquidity shocks do not seem to
be a major driver for the housing market in the euro area. In contrast, idiosyncratic
disturbances to the money supply lead to strongly rising residential property prices in the
EMU.