Identifying Dornbusch's Exchange Rate Overshooting with Structural VECs: Evidence from Mexico

Carlos Capistrán, Daniel Chiquiar and Juan Hernandez
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Carlos Capistrán: Bank of America Merrill Lynch

International Journal of Central Banking, 2019, vol. 15, issue 5, 207-254

Abstract: We propose an approach where, by imposing a rich longrun structure to a structural vector error-correction model (SVEC), we find a response of the exchange rate to monetary policy shocks consistent with Dornbusch's exchange rate overshooting hypothesis in data from Mexico. The model accommodates long-run theoretical relationships on macroeconomic variables (a purchasing power parity, an uncovered interest parity, a money demand, and a relationship between domestic and U.S. output). We identify, estimate, and test the long-run relationships using an ARDL methodology. We then impose a recursiveness assumption on the SVEC to identify the response of domestic variables to a monetary policy shock.

JEL-codes: C32 C51 E10 E17 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Identifying Dornbusch's Exchange Rate Overshooting with Structural VECs: Evidence from Mexico (2017)
Working Paper: Identifying Dornbusch's Exchange Rate Overshooting with Structural VECs: Evidence from Mexico (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2019:q:5:a:6

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