Impulse response functions - 5 Global and idiosyncratic components in in- in-ternational macroe

5 Global and idiosyncratic components in in- in-ternational macroeconomic dynamics

5.2 Impulse response functions

As a further step of the analysis, di¤erences and commonalities across re-gions in the transmission mechanism of the two major common factor shocks may be assessed by means of the impulse response functions. Moreover, the dynamic responses of the endogenous variables to the output growth and in‡ation disturbances may shed some light on the economic interpretation of

the global shocks. To this aim, Figures 3 to 7 display, for each region, the median impulse responses of the seven macroeconomic variables to a one-standard deviation shock to the output growth factor (in the plots of the

…rst two rows) and to the in‡ation factor (in the last two rows) over a ten-year horizon; 95% con…dence bands (obtained by Monte Carlo simulation) are also shown. Apart from the intereset rate series, the impulse responses have been cumulated over time, to show the dynamic reaction of the level of output, the price level, the short-term and long-term interest rates, the level of the nominal money aggregate, the real e¤ective exchange rate, and the real stock market index.

Several facts stand out. A positive global output shock increases perma-nently the level of GDP in all regions and, with only one exception, has also a permanent positive e¤ect on the price level: these responses are consistent with the interpretation of the global output shock as capturing demand-side disturbances. The exception is represented by the Japanese price level, which responds with a temporary decrease (that becomes not statistically signi…cant after about one year) to a positive global output disturbance. In all regions, following the shock, nominal money aggregates increase perma-nently (though not signi…cantly in the euro area), and both the short-term and the long-term interest rates show a temporary rise, that may re‡ect a (restrictive) monetary policy reaction, leading to a fall in stock prices (the latter e¤ect being not statistically signi…cant in Japan). Finally, the real exchange rate features a prolonged depreciation in the US and Canada, and an opposite behavior in the remaining three regions, with only a short-lived appreciation in the euro area.

As previously discussed, a tentative interpretation of the global in‡ation shock as capturing supply-side forces, such as productivity disturbances, can be provided, since it represents deviations from a common downward trend in the in‡ation rate and interest rates mainly attributable to monetary policy management. The responses of output and prices to a global in‡ation shock are not at variance with this interpretation. In the face of an unexpected increase in the global in‡ation factor, output decreases and the price level increases permanently in all regions, with the only exception of Japan for the latter variable. Interest rates react with a temporary rise, and money balances increase permanently (though not signi…cantly in the euro area).

No other signi…cant e¤ects are found, except for a negative reaction of UK stock prices.²⁵

25Results for the impulse responses to the oil and stock market global shocks are available upon request from the authors. In short, the response to an oil price shock is consistent with the expected e¤ects of a negative supply side disturbance, leading to an increase in production costs, a contraction in real output and in real stock prices, and an increase

On the whole, the above results point to a broadly similar transmission mechanism of global disturbances across regions, with the notable exception of Japan. The latter country displays a more idiosyncratic behavior that might be consistent with the structural change brought about by the long period of stagnation su¤ered by Japan during most of the 1990s.²⁶

6 Conclusions

In this paper, international comovements among a set of key real and nominal macroeconomic variables have been investigated, using data for the US, the UK, Japan, Canada and the countries of the Euro-area for the 1980-2005 period, and applying a Factor Vector Autoregressive approach based on Stock and Watson (2005b).

There is strong evidence of international comovements not only among GDP growth rates (as extensively documented in the literature), but also among real stock returns and among in‡ation rates; moreover, a common global factor drives in‡ation, interest rates and monetary aggregates. Shocks to both the output growth common factor and the in‡ation factor play an important role in explaining international output ‡uctuations, whereas other common driving forces, such as the common stock market factor and oil price factor give only a negligible contribution to overall macroeconomic dynamics.

The responses of the macroeconomic variables to structural disturbances to the output growth and to the in‡ation factors are broadly consistent with the interpretation of the …rst as mainly demand-determined, and of the second as re‡ecting supply-side forces, determining deviations from a downward trend -mainly attributable to monetary policy management- common to in‡ation rates, interest rates, and monetary growth rates. The analysis of the impulse response functions also points to a broadly similar transmission mechanisms of global disturbances across regions, with the only notable exception of Japan, that displays a more idiosyncratic behavior.

in the price level. Evidence of monetary accommodation of the shock is also found. On the other hand, the responses to a positive global stock market shock are consistent with signi…cant wealth/Tobin’s “Q”e¤ects, leading to a permanent increase in real stock prices, output and the price level.

26The robustness of the impulse response results to the variable ordering has been as-sessed by computing generalized impulse response functions (Pesaran and Shin 1998).

We have found that the orthogonal impulse responses are robust, since there is only one case (the reaction of US GDP to the global output disturbance) in which the response changes sign when generalized, rather than orthogonal, impulse responses are computed.

In all other cases, the orthogonal and generalized impulse responses yield qualitatively very similar results, never statistically di¤erent at the 5% signi…cance level.

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Table 1 Unit-root tests

ADFm ADFt ADFnlt KP SSm KP SSt KP SSnlt

gU S -3.82** -3.53** -6.86** 0.12 0.08 0.07*

gJ A -8.15** -8.90** -10.04** 0.87** 0.16* 0.04

gEA -8.02** -8.18** -8.01** 0.20 0.18 0.09**

gU K -6.49** -6.49** -6.48** 0.20 0.10 0.09**

gCA -5.96** -5.93** -5.46** 0.09 0.05 0.05

U S -8.07** -8.60** -7.68** 1.31** 0.17 0.08**

J A -2.86 -3.52* -8.79** 0.49* 0.14 0.12**

EA -3.37* -2.84 -7.55** 0.26 0.09 0.10**

U K -3.45** -3.37 -5.01** 0.86** 0.08 0.05

CA -6.93** -7.95** -6.98** 0.44 0.10 0.04

s_{U S} -1.52 -2.92 -3.89 0.39 0.05 0.02

sJ A -1.53 -2.37 -3.57 0.35 0.01 0.01

sEA -1.17 -2.36 -2.81 0.35 0.03 0.02

sU K -1.13 -2.04 -2.80 0.24 0.04 0.04

sCA -1.66 -4.27** -2.90 0.19 0.03 0.03

lU S -2.20 -4.26** -5.80** 0.27 0.07 0.02

lJ A -1.73 -2.06 -2.14 0.33 0.03 0.03

lEA -1.56 -3.16 -3.57 0.37 0.02 0.02

l_{U K} -1.17 -2.79 -3.66 0.24 0.03 0.03

lCA -2.08 -4.88** -4.91* 0.20 0.05 0.03

mU S -5.39** -5.45** -7.72** 0.41 0.25** 0.07*

mJ A -1.95 -3.02 -4.16 0.28 0.10 0.06

mEA -2.39 -2.15 -7.48** 0.35 0.13 0.04

mU K -2.35 -1.90 -6.06** 0.40 0.05 0.03

mCA -3.10* -3.08 -8.07** 0.20 0.13 0.06

eU S -8.30** -8.26** -8.88** 0.17 0.15 0.03

eJ A -7.51** -7.77** -7.87** 0.21 0.03 0.03

eEA -6.98** -6.93** -7.50** 0.12 0.07 0.02

eU K -7.81** -7.86** -7.96** 0.05 0.04 0.03

e_CA -6.95** -6.97** -7.51** 0.15 0.15* 0.04

fU S -9.28** -9.36** -9.59** 0.10 0.08 0.04

fJ A -11.49** -11.67** -12.54** 0.25 0.08 0.05

fEA -6.35** -6.46** -6.55** 0.08 0.05 0.05

fU K -10.61** -10.83** -11.26** 0.18 0.04 0.04

fCA -8.93** -8.88** -8.96** 0.06 0.03 0.03

oU S -7.89** -7.96** -8.79** 0.32 0.03 0.02

oJ A -7.48** -7.84** -8.41** 0.30 0.04 0.03

oEA -7.38** -7.96** -8.54** 0.22 0.05 0.03

oU K -7.96** -7.43** -8.74** 0.23 0.04 0.03

oCA -8.13** -8.14** -9.04** 0.31 0.03 0.02

The …rst (last) three numeric columns report the ADF (KPSS) tests for three speci…cations of the deterministic trend: a constant (ADFmandKP SSm), a constant plus a linear trend ((ADFt and KP SSt), and a constant plus a non linear trend (Enders and Lee, 2005) (ADFnltandKP SSnlt). For theADF tests critical values are -2.89 (-3.50), -3.46 (-4.06), and -4.35 (-4.95), for the 5% (1%) signi…cance level.

The corresponding values for theKP SStests are 0.46 (0.73) , 0.15 (0.22), and 0.06 (0.08). Critical values for theKP SSnlttest have been tabulated by means of Monte Carlo simulations with 10.000 replications. * and ** denote signi…cance at the 5%

and 1% level respectively. De…nitions of the series are given in the text.

Table 2

Principal components analysis on separate sub-sets of variables

P C1 P C2 P C3 P C4 P C5 P C1 P C2 P C3 P C4 P C5

g(all) 0.40 0.23 0.16 0.13 0.08 m(all) 0.49 0.20 0.14 0.12 0.06

g_{U S} 0.66 0.07 0.06 0.00 0.21 m_{U S} 0.28 0.40 0.25 0.07 0.00

gJ A 0.04 0.64 0.24 0.08 0.00 mJ A 0.70 0.00 0.01 0.18 0.12

gEA 0.32 0.27 0.09 0.31 0.00 mEA 0.46 0.02 0.34 0.18 0.00

gU K 0.43 0.01 0.31 0.25 0.00 mU K 0.75 0.01 0.00 0.07 0.16

gCA 0.56 0.16 0.10 0.00 0.18 mCA 0.24 0.56 0.09 0.10 0.01

(all) 0.70 0.11 0.08 0.06 0.04 e(all) 0.37 0.24 0.21 0.18 0.01

U S 0.72 0.00 0.18 0.08 0.02 eU S 0.76 0.04 0.18 0.01 0.02

J A 0.56 0.36 0.06 0.00 0.01 eJ A 0.31 0.30 0.13 0.24 0.01

EA 0.71 0.09 0.13 0.00 0.07 eEA 0.58 0.28 0.06 0.06 0.02

U K 0.76 0.00 0.04 0.20 0.00 eU K 0.04 0.54 0.23 0.19 0.00

CA 0.76 0.11 0.00 0.01 0.12 eCA 0.15 0.03 0.43 0.39 0.00

s(all) 0.88 0.06 0.04 0.02 0.01 f (all) 0.57 0.19 0.13 0.08 0.03

sU S 0.82 0.15 0.01 0.02 0.00 fU S 0.82 0.02 0.07 0.00 0.09

sJ A 0.88 0.09 0.04 0.02 0.02 fJ A 0.07 0.92 0.01 0.00 0.00

sEA 0.90 0.04 0.00 0.00 0.02 fEA 0.55 0.00 0.32 0.12 0.00

sU K 0.86 0.00 0.13 0.00 0.00 fU K 0.69 0.00 0.07 0.23 0.01

s_CA 0.93 0.02 0.00 0.04 0.01 f_CA 0.70 0.02 0.19 0.03 0.05

l(all) 0.95 0.02 0.01 0.01 0.01 o(all) 0.95 0.02 0.02 0.01 0.00

lU S 0.94 0.05 0.00 0.00 0.01 oU S 0.96 0.03 0.00 0.00 0.01

lJ A 0.94 0.04 0.02 0.00 0.00 oJ A 0.93 0.01 0.05 0.00 0.00

lEA 0.96 0.00 0.03 0.01 0.00 oEA 0.96 0.02 0.01 0.02 0.00

l_{U K} 0.96 0.01 0.00 0.03 0.00 o_{U K} 0.95 0.01 0.02 0.01 0.00

lCA 0.97 0.01 0.00 0.00 0.02 oCA 0.96 0.03 0.00 0.00 0.01

This table reports the results of the principal components (P C) analysis conducted on 8 sub-sets of series, each comprising the same variable for all the 5 regions. For each set the …rst row shows the fraction of the total variance explained by each

P Ci (i = 1; :::5); the subsequent …ve rows display the fraction of the variance of the individual series attributable to each P Ci. The P C analysis is carried out on the standardized variables.

Table 3

Principal components analysis: in‡ation, interest rates and money growth as a group

P C1 P C2 P C3 P C4 P C5 P C6 P C7 P C8 P C9 P C10

; s; l; m(all) 0.65 0.08 0.04 0.04 0.04 0.03 0.02 0.02 0.02 0.01

U S 0.45 0.11 0.18 0.04 0.06 0.01 0.01 0.00 0.06 0.06

J A 0.44 0.00 0.12 0.00 0.08 0.28 0.00 0.05 0.01 0.01

EA 0.71 0.01 0.00 0.17 0.01 0.02 0.00 0.00 0.00 0.02

U K 0.63 0.09 0.06 0.00 0.02 0.00 0.01 0.09 0.03 0.05

CA 0.62 0.04 0.00 0.12 0.02 0.04 0.01 0.00 0.04 0.01

sU S 0.83 0.00 0.01 0.01 0.04 0.04 0.00 0.00 0.00 0.01

s_{J A} 0.83 0.07 0.00 0.00 0.01 0.01 0.03 0.00 0.00 0.01

sEA 0.83 0.10 0.00 0.00 0.01 0.00 0.01 0.00 0.00 0.00

sU K 0.81 0.00 0.00 0.05 0.00 0.04 0.01 0.04 0.01 0.01

sCA 0.91 0.00 0.00 0.00 0.01 0.01 0.00 0.00 0.00 0.00

lU S 0.88 0.02 0.01 0.00 0.00 0.02 0.00 0.01 0.01 0.01

lJ A 0.90 0.05 0.00 0.00 0.00 0.00 0.01 0.00 0.00 0.01

l_EA 0.96 0.10 0.00 0.00 0.00 0.01 0.00 0.01 0.00 0.00

lU K 0.93 0.02 0.00 0.02 0.00 0.00 0.00 0.00 0.00 0.00

lCA 0.94 0.01 0.00 0.00 0.00 0.02 0.00 0.01 0.00 0.00

mU S 0.09 0.05 0.53 0.06 0.17 0.01 0.08 0.00 0.00 0.00

mJ A 0.47 0.08 0.10 0.15 0.01 0.00 0.07 0.01 0.06 0.00

mEA 0.35 0.00 0.08 0.19 0.25 0.07 0.03 0.00 0.00 0.00

m_{U K} 0.47 0.21 0.05 0.05 0.00 0.00 0.03 0.09 0.07 0.01

mCA 0.05 0.59 0.05 0.00 0.11 0.00 0.16 0.01 0.01 0.00

This table reports results for the …rst ten principal components (P C) extracted from a set of variables including the in‡ation rates, the short-term and long-term

interest rates and the nominal money growth rates for all regions. The …rst row shows the fraction of the total variance explained by eachP C_i (i = 1; :::10); the

subsequent rows display the fraction of the variance of the individual series attributable to each P C_i. The P C analysis is carried out on the standardized

variables.

Table 4

Principal components analysis by country

P C1 P C2 P C3 P C4 P C5 P C6 P C7 P C8

U S(all) 0.34 0.19 0.13 0.12 0.10 0.08 0.04 0.00 g_{U S} 0.04 0.03 0.33 0.60 0.01 0.00 0.00 0.00

U S 0.55 0.21 0.00 0.00 0.05 0.00 0.19 0.00

sU S 0.92 0.01 0.00 0.01 0.01 0.01 0.01 0.03 lU S 0.83 0.01 0.00 0.01 0.01 0.06 0.06 0.02 mU S 0.18 0.20 0.19 0.13 0.05 0.25 0.00 0.00 eU S 0.14 0.01 0.47 0.18 0.08 0.13 0.00 0.00 f_{U S} 0.03 0.35 0.06 0.00 0.54 0.02 0.00 0.00 oU S 0.00 0.71 0.01 0.00 0.09 0.13 0.07 0.00 J A(all) 0.38 0.19 0.13 0.11 0.08 0.06 0.05 0.00 gJ A 0.10 0.30 0.20 0.26 0.03 0.07 0.04 0.00

J A 0.52 0.02 0.14 0.08 0.00 0.04 0.20 0.00

s_{J A} 0.88 0.01 0.01 0.00 0.00 0.02 0.07 0.01 lJ A 0.90 0.00 0.03 0.00 0.01 0.00 0.05 0.01 mJ A 0.50 0.12 0.04 0.00 0.07 0.26 0.01 0.00 eJ A 0.05 0.36 0.28 0.03 0.26 0.02 0.00 0.00 fJ A 0.01 0.29 0.16 0.49 0.01 0.03 0.01 0.00 oJ A 0.05 0.42 0.20 0.02 0.28 0.03 0.00 0.00 EA(all) 0.40 0.18 0.15 0.11 0.07 0.06 0.03 0.00

gEA 0.05 0.04 0.22 0.68 0.01 0.00 0.00 0.00

EA 0.85 0.01 0.02 0.00 0.00 0.00 0.12 0.00

sEA 0.86 0.00 0.02 0.01 0.07 0.00 0.02 0.02

lEA 0.86 0.00 0.03 0.01 0.08 0.00 0.01 0.01

m_EA 0.53 0.02 0.00 0.00 0.43 0.00 0.02 0.00

eEA 0.04 0.75 0.00 0.01 0.00 0.20 0.00 0.00

fEA 0.01 0.34 0.38 0.15 0.00 0.12 0.00 0.00

oEA 0.00 0.28 0.53 0.06 0.00 0.13 0.00 0.00

U K(all) 0.41 0.16 0.13 0.11 0.09 0.05 0.03 0.02 g_{U K} 0.19 0.31 0.01 0.17 0.27 0.05 0.00 0.00

U K 0.78 0.01 0.01 0.01 0.01 0.01 0.17 0.00

sU K 0.89 0.01 0.00 0.00 0.00 0.02 0.02 0.06 lU K 0.82 0.03 0.01 0.00 0.00 0.05 0.06 0.03 mU K 0.60 0.04 0.01 0.02 0.06 0.27 0.00 0.00 eU K 0.02 0.33 0.36 0.11 0.17 0.01 0.00 0.00 f_{U K} 0.01 0.38 0.01 0.58 0.01 0.00 0.01 0.00 oU K 0.01 0.18 0.65 0.00 0.16 0.00 0.00 0.00 CA(all) 0.36 0.16 0.15 0.12 0.09 0.07 0.04 0.01

gCA 0.19 0.00 0.14 0.49 0.00 0.18 0.00 0.00

CA 0.75 0.00 0.01 0.01 0.01 0.00 0.22 0.00

sCA 0.89 0.00 0.00 0.04 0.00 0.00 0.05 0.02

lCA 0.84 0.01 0.00 0.10 0.00 0.00 0.03 0.02

mCA 0.13 0.18 0.25 0.10 0.31 0.03 0.00 0.00

eCA 0.04 0.58 0.01 0.05 0.25 0.07 0.00 0.00

fCA 0.08 0.49 0.02 0.16 0.04 0.21 0.00 0.00

oCA 0.02 0.00 0.74 0.01 0.12 0.11 0.00 0.00

This table reports the results of the P C analysis conducted separately on all vari-ables for each country/region. For each set the …rst row shows the fraction of the total variance explained by each P Ci (i = 1; :::8); the subsequent eight rows display the fraction of the variance of the individual series attributable to each P Ci. The

P Canalysis is carried out on the standardized variables.

Table 5

Variance decomposition based on the four-factor F V AR

Horizon

(q u a rte rs ) Global shocks Idiosyncratic shocks

output in‡ation stock mkt. oil price All domestic All

gU S 1 24.9 23.3 1.4 0.0 49.6 50.4 50.4

20 25.1 33.9 3.7 0.0 62.9 16.7 37.1

U S 1 0.5 96.9 0.1 0.2 97.7 2.3 2.3

20 1.8 95.2 0.5 0.9 98.3 1.2 1.7

sU S 1 0.0 98.7 0.0 0.1 98.8 1.0 1.2

20 0.3 97.1 0.1 0.3 97.8 1.3 2.2

lU S 1 0.0 98.4 0.0 0.1 98.5 1.2 1.5

20 0.4 95.3 0.1 0.4 96.3 2.0 3.7

mU S 1 0.1 90.9 0.0 0.0 91.0 5.0 9.0

20 1.0 90.2 0.1 0.6 91.9 2.9 8.1

eU S 1 8.4 2.8 0.1 0.0 11.2 49.0 88.8

20 1.3 15.9 0.7 2.9 20.7 40.0 79.3

fU S 1 25.0 45.4 0.6 1.6 72.6 14.4 27.4

20 32.4 45.2 0.2 2.4 80.3 5.5 19.7

gJ A 1 13.8 80.4 0.5 0.1 94.9 5.1 5.1

20 16.3 70.7 1.5 0.3 88.8 3.0 11.2

J A 1 1.5 89.3 0.0 0.0 90.9 7.1 9.1

20 0.2 91.1 0.1 0.8 92.2 3.5 7.8

sJ A 1 0.0 98.4 0.0 0.1 98.5 0.6 1.5

20 0.2 93.9 0.0 0.4 94.4 1.5 5.6

lJ A 1 0.0 98.5 0.0 0.1 98.6 0.5 1.4

20 0.2 96.5 0.0 0.3 97.0 1.1 3.0

mJ A 1 0.3 95.1 0.0 0.1 95.5 2.6 4.5

20 1.9 82.5 0.3 0.2 84.9 5.0 10.1

eJ A 1 6.3 0.4 0.4 0.0 7.1 26.3 92.9

20 6.3 1.7 0.5 0.0 8.5 26.9 91.5

fJ A 1 0.7 30.7 0.5 0.0 31.9 31.3 68.1

20 1.3 19.8 0.7 0.8 22.5 28.8 77.5

gEA 1 8.9 57.2 0.1 0.1 66.2 28.0 33.8

20 16.9 31.4 1.7 0.4 50.4 24.6 49.6

EA 1 2.4 11.5 1.1 0.1 15.0 76.9 85.0

20 4.7 67.6 1.7 4.9 78.9 4.7 21.1

sEA 1 0.0 98.7 0.0 0.1 98.8 0.4 1.2

20 0.2 96.1 0.1 0.4 96.7 0.8 3.3

lEA 1 0.0 98.6 0.0 0.1 98.7 0.3 1.3

20 0.3 96.0 0.1 0.5 96.9 0.6 3.1

mEA 1 0.0 87.8 0.0 0.0 87.8 7.1 12.2

20 0.5 53.3 0.0 1.2 55.0 14.0 45.0

eEA 1 1.0 56.6 0.1 0.0 57.6 15.5 42.4

20 0.7 6.2 2.4 2.2 11.5 27.0 88.5

fEA 1 23.7 28.0 0.2 1.0 52.8 25.0 47.2

20 23.4 31.5 0.7 1.9 57.4 17.3 42.6

(continued)

(Table 5 continued)

Horizon

(q u a rte rs ) Global shocks Idiosyncratic shocks

output in‡ation stock mkt. oil price All domestic All

gU K 1 8.0 19.2 0.2 0.6 27.9 56.6 72.1

20 3.8 32.2 0.1 3.2 39.4 24.6 60.6

U K 1 0.0 97.8 0.0 0.1 97.9 1.5 2.1

20 0.4 95.9 0.1 0.5 96.9 1.4 3.1

sU K 1 0.0 97.9 0.0 0.1 99.1 0.4 0.9

20 0.1 99.0 0.0 0.2 98.2 0.6 1.8

lU K 1 0.0 99.0 0.0 0.1 99.0 0.3 1.0

20 0.2 98.1 0.0 0.2 99.6 0.4 1.4

mU K 1 0.1 97.8 0.0 0.0 97.9 1.4 2.1

20 0.7 91.4 0.1 0.2 92.3 1.9 7.7

eU K 1 0.0 0.1 0.0 0.2 0.3 43.0 99.7

20 1.1 2.1 0.2 0.2 3.6 36.2 96.4

fU K 1 6.0 70.0 1.2 1.0 78.2 9.4 21.8

20 14.5 68.4 1.5 2.7 87.1 4.9 12.9

g_CA 1 24.0 15.7 1.4 0.0 41.2 41.7 58.8

20 25.3 27.1 4.0 0.4 56.8 22.7 43.2

CA 1 0.1 85.6 0.0 0.1 85.8 11.2 14.2

20 2.0 91.4 0.5 1.3 95.3 2.3 4.7

sCA 1 0.0 98.6 0.0 0.1 98.7 0.6 1.3

20 0.6 96.3 0.2 0.5 97.5 0.8 2.5

l_CA 1 0.0 98.8 0.0 0.1 98.9 0.1 1.1

20 0.5 96.6 0.1 0.5 97.7 0.4 2.3

mCA 1 0.3 91.5 0.1 0.0 91.9 4.7 8.1

20 0.4 70.0 0.1 0.1 70.6 6.9 29.4

eCA 1 5.1 3.2 0.0 0.2 8.5 46.3 91.5

20 0.7 0.7 0.0 0.3 1.7 35.0 98.3

f_CA 1 22.1 0.0 0.8 1.5 24.4 25.2 75.6

20 28.7 3.9 0.5 2.9 36.0 7.7 64.0

This table reports for each endogenous variable the median forecast error variance decomposition at the one-quarter and …ve-year horizons obtained from the struc-tural V M Arepresentation of the four-factor F V AR model in (5) by Monte Carlo simulation as suggested in Granger and Jean (2004). For each variable the table shows the percentage of forecast error variance attributable to each global factor shock (“output”, “in‡ation”, “stock market” and “oil price”) together with their sum (“All”, in bold); the last two columns report the percentage of the forecast error variance attributable to the own-country idiosyncratic shocks (“domestic”) and the proportion due to all (domestic and foreign) idiosyncratic disturbances (“All”, in bold).

Figure 1

Groups of series with …rst principal components

-1.5

GDP grow th Inflation rate Short-term interest rate

Long-term interest rate Nom inal m oney grow th rate Real exchange rate changes

Real stock returns Real oil price changes

Each panel displays, for each variable in turn, the series for the …ve countries /regions (dotted lines) from which the …rst principal component (thick solid line) is extracted. All series are shown as nine-quarter centered moving averages. The sample period is: 1980(1)-2005(2).

Figure 2

Global “in‡ation factor" and in‡ation rates, interest rates and money growth rates

-2 -1 0 1 2 3

80 82 84 86 88 90 92 94 96 98 00 02 04

-2 -1 0 1 2 3

80 82 84 86 88 90 92 94 96 98 00 02 04

-2 -1 0 1 2 3

80 82 84 86 88 90 92 94 96 98 00 02 04

-2 -1 0 1 2 3

80 82 84 86 88 90 92 94 96 98 00 02 04

Factor US

JA EU

UK CA

Inflation rate Short-term interest rate

Long-term interest rate Nominal money growth rate

In all panels the thick solid line shows the …rst principal component extracted from the set of the in‡ation rates, short-term and long-term interest rates, and nominal money growth rates. The dotted lines show the original , s, l and m series for the …ve countries/regions. All series are shown as nine-quarter centered moving averages. The sample period is: 1980(1)-2005(2).

Figure 3

Impulse response functions to common factor shocks: United States

0.0

Responses to global output shock

Responses to global inflation shock

Output Price level Short-term interest rate Long-term interest rate

Nominal money aggregate

Output Price level Short-term interest rate Long-term interest rate

The …gure displays the median impulse responses of the level of output, the price level, the short-term interest rate, the long-term interest rate, the nominal money aggregate, the real e¤ective exchange rate and the real stock price index to a one-standard deviation shock to the global “output growth” factor (plots in the …rst two rows) and to the global “in‡ation” factor (plots in the last two rows). A 95%

con…dence interval, obtained by Monte Carlo simulation, is shown in each plot.

The responses are displayed over a ten-year horizon.

Figure 4

Impulse response functions to common factor shocks: Japan

Responses to global output shock

Responses to global inflation shock Output

con…dence interval, obtained by Monte Carlo simulation, is shown in each plot.

The responses are displayed over a ten-year horizon.

Figure 5

Impulse response functions to common factor shocks: Euro Area

0.0

Responses to global output shock

Responses to global inflation shock Output

con…dence interval, obtained by Monte Carlo simulation, is shown in each plot.

The responses are displayed over a ten-year horizon.

Figure 6

Impulse response functions to common factor shocks: United Kingdom

0.0

Responses to global output shock

Responses to global inflation shock Output

con…dence interval, obtained by Monte Carlo simulation, is shown in each plot.

The responses are displayed over a ten-year horizon.

Figure 7

Impulse response functions to common factor shocks: Canada

0.0

Responses to global output shock

Responses to global inflation shock Output

con…dence interval, obtained by Monte Carlo simulation, is shown in each plot.

The responses are displayed over a ten-year horizon.

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