Delayed Overshooting: Is It an '80s Puzzle?

Seong-Hoon Kim, Seongman Moon and Carlos Velasco

Journal of Political Economy, 2017, vol. 125, issue 5, 1570 - 1598

Abstract: We reinvestigate the delayed overshooting puzzle. Using a method of sign restrictions, we find that delayed overshooting is primarily a phenomenon of the 1980s when the Fed was under the chairmanship of Paul Volcker. Related findings are as follows: (1) Uncovered interest parity fails to hold during the Volcker era and tends to hold during the post-Volcker era; (2) US monetary policy shocks have substantial impacts on exchange rate variations but misleadingly appear to have small impacts when monetary policy regimes are pooled. In brief, we confirm Dornbusch's overshooting hypothesis.

Date: 2017
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