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The authors thank Tam Bayoumi, Martin Mϋhleisen, Akito Matsumoto and seminar participants at Strategy, Policy, and Review Department of the IMF, for many helpful comments and suggestions.
It should be noted that there was wide variability in the growth rate of asset prices amongst the G-7 countries and in particular house prices. The USA and the U.K. experienced very large house price increases, whereas the increase in Germany and Japan was less pronounced.
Others, including Bernanke (2005), argue that the imbalances were a result of the global savings glut. A counter argument to this view is provided by Taylor (2009), who argues that loose monetary policy in the U.S. played a major role in domestic asset appreciation during that period.
Hendry (2001) in a study of inflation in the U.K. suggest that domestic money and interest rates had a limited role in inflation or long term interest rates. These findings allude to the fact that global factors might be exerting a large effect on domestic variables.
This measure was introduced in an empirical setting by Matsumoto and Schindler (2006). Using other global currencies like the Euro or the Yen generates similar trends in global liquidity measure.
Global variables in the spillover analysis are G-6 rather than G-7 aggregates which exclude the country under investigation. Similarly, the global liquidity indicator is corrected for country i’s contribution. These variables are denoted with a tilde.
Note that this implies an inconsistency in the identifying assumptions underlying our different models. While in the global analysis, a shock to any country i’s GDP can affect all other global variables in line with its share of global GDP-this channel is absent in the spillover analysis.
We observe the price puzzle despite the inclusion of a commodity price index (CoPI), which includes crude oil prices. This hints at the fact that our CoPI does not capture long-term inflation expectations.
The persistence of some impulse responses to temporary shocks highlights the nonstationary nature of the underlying processes.
Pihlman and Hoorn (2010) note that central bank reserves represented a significant source of funding for commercial banks of reserve currency areas. The increase in central bank funding, mainly in the form of deposits, was part of an aggressive diversification strategy and an attempt to increase the returns on reserve holdings.