The Importance of Global Shocks for National Policymakers: Rising Challenges for Central Banks

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5.2. Additional global shocks

Our SFAVAR focuses on global forces, like monetary liquidity, inflation, share prices,
etc. However, there could be other variables which also play a role in the global
economy. Hence, we look for the influence of two other forces which may influence our
SFAVAR approach: technology and long-term interest rates. The importance of
technology shocks is stressed in the real business cycle theory (RBC) and in the
endogenous growth literature. There may be international knowledge spillover effects,
like the import of goods that embody new technologies, FDI flows, joint ventures and the
migration of key personnel (Klenow, Rodriguez-Clare 2004). Especially trade-related
new-good externalities could be central in transmitting new technologies from one
country to another. New goods of higher quality are introduced and then imitated by other
companies worldwide.

The second global force which could be interesting is the behavior of long-term
interest rates. Instead of global excess liquidity, the shortage of financial assets could
have played a central role in shaping the global economy in recent years (Caballero,
2006). Emerging markets' FX reserves have been surging under the so-called Bretton
Woods II system. Given increasing global demand for financial assets and limited supply
by industrialized countries, long-term interest rates fell to historically low levels. In
addition, the phenomenon of petrodollar recycling from commodity-exporting countries
exerted further downward pressure on real interest rates. This in turn could have
contributed to the strong rise in house prices in many countries.

In order to derive technology shocks, we use the identification pattern proposed
by GaH (GaH 1999). This procedure has been discussed intensively in the last few years
in the RBC literature. Accordingly, there are technology and non-technology shocks
which are orthogonal to each other. GaH’s basic identifying assumption is that technology
innovations are the only shocks which have an effect on the long-run level of labor
productivity. Assuming that both variations in the log productivity (x_t) and log hours
( n_t ) are integrated of order one, one gets the following expression:

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