The importance of global shocks for national policymakers -
Rising challenges for central banks
Ansgar Belke (University of Duisburg-Essen and DIW Berlin)
Andreas Rees (UniCredit Munich)
Paper prepared for the Meeting of National Economic Research Organizations (NERO),
September 21, 2009, OECD Headquarters, Paris
Abstract
We analyze the importance of global shocks for the global economy and national policy
makers. More specifically, we investigate whether monetary policy has become less
effective in the wake of financial globalization. We also examine whether there is
increasing uncertainty for central banks due to globalization-driven changes in the
national economic structure. A FAVAR framework is applied to derive structural shocks
on a worldwide level and their impact on other global and also national variables. We
estimate our macro model using quarterly data from Q1 1984 to Q4 2007 for the G7
countries plus the euro area. According to our results, global liquidity shocks are a
driving force of the global economy and various national economies. However, some
other shocks originating in house prices, GDP, technology and long-term interest rates
play a role at the global level as well. These results prove to be robust across different
specifications. Structural break tests indicate that global liquidity shocks have recently
become more important as a determinant for house prices. In general, global variables
have become more powerful over time in driving national variables.
JEL codes: C22, E31, E32, F42
Keywords: Global shocks, international business cycle, international policy
coordination and transmission, factor augmented vector autoregressive
(FAVAR) models, common factors
Corresponding author: Ansgar Belke, DIW Berlin and University of Duisburg-Essen,
Campus Essen, Department of Economics, 45117 Essen, Germany. phone: (0049)-201-
1832277, fax: (0049)-201-1834181, e-mail: [email protected]