Monetary Policy and Exchange Rate Overshooting: Dornbusch Was Right After All

Arbeitspapier

Dornbusch's exchange rate overshooting hypothesis is a central building block in international macroeconomics. Yet, empirical studies of monetary policy have typically found exchange rate effects that are inconsistent with overshooting. This puzzling result has been viewed by some researchers as a "stylized fact" to be reckoned with in policy modelling. However, many of these studies, in particular those using VARs, have disregarded the strong contemporaneous interaction between monetary policy and exchange rate movements by placing zero restrictions on them. In contrast, we achieve identification by imposing a long-run neutrality restriction on the real exchange rate, thereby allowing for contemporaneous interaction between the interest rate and the exchange rate. In a study of four open economies, we find that the puzzles disappear. In particular, a contractionary monetary policy shock has a strong effect on the exchange rate, which appreciates on impact. The maximum effect occurs within 1-2 quarters, and the exchange rate thereafter gradually depreciates to baseline, consistent with the Dornbusch overshooting hypothesis and with few exceptions consistent with UIP.

Angaben zum Objekt

• ISBN: 978-82-7553-504-5
• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Working Paper ; No. 2009/09

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models ; Monetary Policy ; Foreign Exchange ; Open Economy Macroeconomics
• Thema: UIP ; uncovered interest parity ; structural VAR ; Dornbusch overshooting ; exchange rate ; monetary policy

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Bjørnland, Hilde C.
• Ereignis: Veröffentlichung
• (wer): Norges Bank
• (wo): Oslo
• (wann): 2009

Weitere Informationen

• Handle: http://hdl.handle.net/10419/209925
• Letzte Aktualisierung: 10.03.2025, 11:42 MEZ