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Delayed overshooting can still be a puzzle after the 1980s

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  • Ahn, Jihye
  • Kim, Soyoung

Abstract

This paper reinvestigates the effects of US monetary policy shocks on exchange rates by using the structural VAR model with sign restrictions imposed on impulse responses following Kim et al. (2017) who documented that a delayed overshooting puzzle was not observed in the post-Volcker era. The main results are as follows. First, a huge uncertainty in the result of the nominal exchange rate response, which is the main variable of interest in Dornbusch’s overshooting theory, can be observed although Kim et al. (2017) investigated mostly the real exchange rate response. Second, the delayed overshooting puzzle for both nominal and real exchange rates is found for the model that includes non-borrowed reserves divided by a lag of total reserves, instead of current total reserves used by Kim et al. (2017), to be consistent with monetary policy operating procedure.

Suggested Citation

  • Ahn, Jihye & Kim, Soyoung, 2021. "Delayed overshooting can still be a puzzle after the 1980s," Economics Letters, Elsevier, vol. 199(C).
    • Handle: RePEc:eee:ecolet:v:199:y:2021:i:c:s0165176520304663
    DOI: 10.1016/j.econlet.2020.109706
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    References listed on IDEAS

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    1. Martin Eichenbaum & Charles L. Evans, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(4), pages 975-1009.
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    3. Müller, Gernot & Wolf, Martin & Hettig, Thomas, 2019. "Exchange Rate Undershooting: Evidence and Theory," CEPR Discussion Papers 13597, C.E.P.R. Discussion Papers.
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    7. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    8. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
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    More about this item

    Keywords

    VAR; Monetary policy shocks; Exchange rate; Delayed overshooting; NBRX;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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