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

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Table 5 - Andrews-Quandt breakpoint tests for SFAVAR shocks

Note 1: Sign of trend, if significant, in parentheses

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

The same procedure is repeated for factor loadings in order to examine whether
the transmission mechanism between global factors and national variables has changed
over time. The lag length in the lag polynomial D(L) is set uniformly to two which is
sufficient to avoid autocorrelation.¹⁰ 15 of the 30 implemented Andrews-Quandt
breakpoint tests indicate a sharp break in the respective factor loading on the basis of
conventional significance levels. Especially prone to instability is the relation between
global and national GDP with breaks in the US, the EMU, Japan and the UK. Only in
Canada can no structural variation be found.

The relations between global factors and national variables are also unstable with
respect to money and house prices with three of five possible breaks each. It is important
to note that the breaks typically do not occur at approximately the same time across
countries. For example, the break between global and EMU money is in Q2 1994,
whereas it is in Q1 2002 for the US. The same irregular pattern can also be found for
house prices and GDP. In our view, this argues against a big bang in economic and
financial globalization with the G-7 countries and the euro zone influenced by global
forces at approximately the same time. Instead, the global factors seemingly started
influencing national variables differently at various points in time.

¹⁰ The results prove to be robust when different lag specifications are tried.

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