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

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signs of structural instability emerge. In contrast, the null hypothesis of structural stability
in the remaining equations is not rejected.

Table 4 - Andrews-Quandt breakpoint tests for SFAVAR coefficients

Note 1: Heteroskedasticity-robust version of Maximum LR test for 'propagation'

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

Due to our trimming exercise, 15 percent of the sample period gets lost both at the
start and the end of the sample period. Hence, the most recent years from 2004 to 2007 in
the run-up to the global financial crisis are excluded from the Andrews-Quandt tests
above. As an alternative for detecting structural breaks, we opted for estimating the
following dummy approach (Boivin and Giannoni, 2008):

(11)   Ft = Φ ( L ) F_t_1 + Φ ^d ( L ) d_tF_t._l + Gη_t

where d_t takes the value 0 for the period Q1 1984 - Q4 2001 and 1 afterwards.

The coefficients on the global factors are equal to Φ ( L ) for Q1 1984 - Q4 2001 and to
Φ(L) + Φ^d (L) thereafter. We regard our dummy approach as an interesting alternative to
the data-consuming Andrews-Quandt tests. Accordingly, the effects of global liquidity
shocks have seemingly become stronger from 2002 to 2007. Interestingly, the most
pronounced impact can be found on global house prices. After three quarters, the effect of
a global liquidity shock gets stronger and more persistent in comparison to the baseline
SFAVAR. On average, the impact on global house prices from Q3 to Q20 increases by
50%. We take this as a first indication that the propagation mechanism in the global
economy may have changed in recent years and the importance of global money supply
shocks has risen. In addition, global demand shocks have also played a more important
role as the impact on inflation has risen.

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