Year: 2023
Type: article
Abstract: Summary 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.
Source: Journal of Applied Econometrics
DOI: 10.1002/jae.2999
Authors: Sebastian K. Rüth, Wouter Van der Veken
Institutions: University of Erfurt, Ghent University, National Bank of Belgium
Language: English
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W4385239968