Puzzling Global Stochastic Trends in Growth, Interest and Inflation and the Volcker Disinflation

© 2016 The University of Manchester and John Wiley & Sons Ltd This paper aims to identify the stable long-run relationships as well as unstable driving forces of the world economy using a small aggregated cointegrated VAR model encompassing quarterly US, UK, Japanese and Euro Area data for the post-Bretton-Woods era. Three stable long-run relationships are found: output growth, the term spread and the inflation climate. The common stochastic trend of the global macro economy is dominated by the cumulated real short-term interest rate shocks, reflecting the strong increase of global real rates during the Volcker disinflation period, one of the dominating events of the last 40 years of macro history