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Monetary policy and exchange rate anomalies in set‐identified SVARs: Revisited

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  • Sebastian K. Rüth
  • Wouter Van der Veken

Abstract

Set‐identified vector autoregressions typically document violations of uncovered interest rate parity (forward discount puzzle) and gradual appreciation–depreciation cycles of exchange rates (delayed overshooting puzzle) following contractionary monetary policy shocks. We revisit both anomalies in a framework similar to Kim et al. (2017, JPE). We complement their identifying restrictions on how monetary policy affects the economy with restrictions on (i) how monetary policy reacts to the economy and (ii) historical monetary policy innovations. In this hybrid identification, no major forward discount premia emerge. Once we additionally impose that monetary policy propagates through domestic financial conditions, exchange rates also overshoot with less delay.

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  • Sebastian K. Rüth & Wouter Van der Veken, 2023. "Monetary policy and exchange rate anomalies in set‐identified SVARs: Revisited," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(7), pages 1085-1092, November.
  • Handle: RePEc:wly:japmet:v:38:y:2023:i:7:p:1085-1092
    DOI: 10.1002/jae.2999
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