Delayed Overshooting Puzzle: Does Systematic Monetary Policy Matter?

Efrem Castelnuovo, Giovanni Pellegrino and Giacomo Ranzato ()
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Giacomo Ranzato: University of Padova

No 280, "Marco Fanno" Working Papers from Dipartimento di Scienze Economiche "Marco Fanno"

Abstract: We propose a novel identification strategy based on a combination of sign, zero, and policy coefficient restrictions to identify the exchange rate response to a US monetary policy shock. Our strategy crucially hinges upon imposing a sign on the policy response to exchange rate fluctuations, i.e., monetary policy tightens after a depreciation of the US dollar. We support this restriction with narrative evidence as well as empirical evidence from the extant literature. We find an unexpected increase in the policy rate to generate an immediate appreciation followed by a persistent depreciation. This evidence is consistent with the overshooting hypothesis. Importantly, we show that our identification strategy implies robust impulse responses across samples characterized by different monetary policy conducts. Differently, restrictions imposed only on impulse responses return evidence that is subsample specific and associate Volcker’s regime with a delayed overshooting.

Keywords: delayed overshooting; vector autoregressions; monetary policy rule; exchange rate dynamics; Volcker policy regime (search for similar items in EconPapers)
JEL-codes: C32 E44 E52 F31 F41 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2022-06
New Economics Papers: this item is included in nep-cba, nep-mon and nep-opm
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:pad:wpaper:0280

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