Exchange rate overshooting: unraveling the puzzles

Miriam Braig (miriam.braig@uni-erfurt.de), Sebastian Rüth and Wouter Van der Veken
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Miriam Braig: University of Erfurt

No 455, Working Paper Research from National Bank of Belgium

Abstract: We solve a canonical, estimated, medium-sized, open-economy New Keynesian model, cast it into a small-scale population vector autoregression, and assess whether best-practice structural identifications detect textbook “overshooting” after a monetary policy hike—i.e., an instant real appreciation that monotonically reverts. Our results include “delayed overshooting,” “exchange rate puzzles,” “forward discount puzzles,” and model-consistent overshooting. Identifications that regularly indicate open-economy anomalies in empirics likewise produce them in our controlled setup. Vice versa, identifications that prompt theory-conform conclusions in actual data do so in our experimental data. We infer that less empirical evidence may contradict canonical international macro theory than previously understood

Keywords: New open economy macroeconomics; population vector autoregression; invertibility; structural identification; exchange rate; overshooting (search for similar items in EconPapers)
JEL-codes: C32 E32 E52 F41 F42 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2024-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:202409-455

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