Exchange Rate Undershooting: Evidence and Theory

Müller, Gernot, Martin Wolf and Thomas Hettig
Authors registered in the RePEc Author Service: Gernot J. Müller

No 13597, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We reconsider the delayed overshooting puzzle through the lens of a New Keynesian model with information rigidities. In the model, market participants do not directly observe the natural rate of interest and learn from unanticipated shifts in monetary policy about the state of the economy. We estimate the model and find that it can account for the joint responses of spot and forward exchange rates, excess returns, and macroeconomic indicators to monetary policy shocks. Our results suggest that information rigidities are important for understanding exchange rate dynamics.

Keywords: exchange rate; Forward exchange rates; Excess return; Uip puzzle; Monetary policy; Information effect; Information rigidities (search for similar items in EconPapers)
JEL-codes: E43 F31 (search for similar items in EconPapers)
Date: 2019-03
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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