How Important Is Global R-Star for Open Economies?

We study the relevance of global shocks in determining r-star for a set of typically studied advanced open economies (Australia, Canada, Euro Area, New Zealand, Norway, Sweden, and the United Kingdom). To do so, we build on the multivariate Beveridge-Nelson decomposition to account for open economy features by developing an empirical two-block open economy model and also embedding restrictions used in the open economy literature to identify the role of foreign shocks. We document three key findings: (i) shocks driving r-star for the United States are almost entirely sufficient to understand the role of the global r-star for these open economies; (ii) local shocks are also important in determining domestic r-stars, leaving open the potential that domestic economic policies can complement or offset the global forces determining r-star; and (iii) even though local shocks are important, global forces played the leading role in the long-term decline in r-stars for all seven open economies since the global financial crisis.