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Delayed Overshooting: The Case for Information Rigidities

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  • Gernot J. Müller
  • Martin Wolf
  • Thomas Hettig

Abstract

We provide evidence that the delayed overshooting puzzle reflects a slow adjustment of exchange rate expectations to monetary policy shocks rather than a failure of uncovered interest parity. Consistent with this evidence, we put forward a New Keynesian model in which uncovered interest parity holds, but there are information rigidities: investors do not observe monetary policy shocks but learn rationally from unanticipated shifts in monetary policy about the state of the economy. We estimate the model and find it can account for the joint responses of the spot exchange rate, forward exchange rates, and excess currency returns to monetary policy shocks.

Suggested Citation

  • Gernot J. Müller & Martin Wolf & Thomas Hettig, 2024. "Delayed Overshooting: The Case for Information Rigidities," American Economic Journal: Macroeconomics, American Economic Association, vol. 16(3), pages 310-342, July.
    • Handle: RePEc:aea:aejmac:v:16:y:2024:i:3:p:310-42
    DOI: 10.1257/mac.20210212
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    Cited by:

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    2. Kolasa, Marcin & Ravgotra, Sahil & Zabczyk, Pawel, 2025. "Monetary policy and exchange rate dynamics in a behavioral open economy model," Journal of International Economics, Elsevier, vol. 155(C).
    3. Yun, Jaeho, 2025. "Rethinking the delayed overshooting puzzle: An examination through present value framework," Journal of International Money and Finance, Elsevier, vol. 153(C).
    4. Zhu, Xinyu & Adjemian, Michael & Bagnarosa, Guillaume & Gohin, Alexandre, 2026. "Do USDA Reports Align Trader Expectations?," 2026 Annual Meeting, July 26 - 28, 2026, Kansas City, Missouri 404355, Agricultural and Applied Economics Association.
    5. Husnu C. Dalgic, 2025. "When Is Liquidity Bad?," CRC TR 224 Discussion Paper Series crctr224_2025_723, University of Bonn and University of Mannheim, Germany.
    6. Nadia Pozdnyakova, 2026. "Exchange Rate Expectations and Aggregate Dynamics," Working Papers w0294, New Economic School (NES).
    7. Khalil, Makram & Strobel, Felix, 2024. "US trade policy and the US dollar," Journal of International Economics, Elsevier, vol. 151(C).

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    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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