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

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SFAVAR, five are significantly influenced by long-term interest rate shocks. This stands
in stark contrast to the negligible effects of non-systematic variations in the global short-
term interest rate factor.

Two additional results are worth noting. First, our derived common liquidity
shock is at least partly driven by changes in the long-term interest rate disturbance. Our
FAVAR therefore contains not only a pure common money supply shock but some
interest-rate sensitive elements as well. In line with theory, the obtained coefficient is
negative, i.e. there is an inverse relationship between the shock components of the
common money and the long-term interest rate factor. Second, the global house price
disturbance is not driven by long-term interest rate shocks. This is a surprising result,
given the discussion of the interest rate conundrum’s impact on the boom and bust of
residential property prices. Independent of the concrete reasons, we regard both the role
of international knowledge spillovers and the global long-term interest rate factor as an
interesting field for further empirical research.

Table 3 - Testing for omitted long-term interest rate shocks in SFAVAR

Note 1: F-statistics from Wald tests

Note 2: *** Indicates significance at 1% level, ** at 5% level, * at 10% level

5.3. Structural breaks

In the last 25 years, the global economy and international financial markets underwent a
number of profound changes. For example, world trade increased by 658% between 1984
and 2007. According to Lane and Milesi-Ferretti (2007), cross-border holdings of
financial assets in the G-7 countries rose from 116% of GDP in 1990 to 261% in 2004

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