| Title: |
Monetary policy and exchange rate overshooting: Dornbusch was right after all. Mimeo, Norwegian School of Management |
| Authors: |
Hilde C. Bjørnland; Jel-codes C |
| Contributors: |
The Pennsylvania State University CiteSeerX Archives |
| Source: |
http://home.bi.no/a0310125/memo2605_rev.pdf. |
| Publication Year: |
2006 |
| Collection: |
CiteSeerX |
| Subject Terms: |
Exchange rate; uncovered interest parity (UIP; Dornbusch overshooting; monetary policy; Structural VAR |
| Description: |
Dornbusch’s exchange rate overshooting hypothesis is a central building block in international macroeconomics. Yet, empirical studies of monetary policy have typically found exchange rate effects that are inconsistent with overshooting. This puzzling result has by some researches been viewed as a “styled facts ” to be reckoned with in policy modelling. However, many of these studies, in particular those using VARs, have disregarded the strong contemporaneous interaction between monetary policy and exchange rate movements by placing zero restriction on them. In contrast, I achieve identification by imposing a long-run neutrality restriction on the real exchange rate, thereby allowing for contemporaneous interaction between the interest rate and the exchange rate. In a study of five open economies, I find that the puzzles disappear. In particular, a contractionary monetary policy shock has a strong effect on the exchange rate that appreciates on impact. The maximum effect occurs immediately, and the exchange rate thereafter gradually depreciates to baseline, consistent with the Dornbusch overshooting hypothesis and with few exceptions consistent with UIP. |
| Document Type: |
text |
| File Description: |
application/pdf |
| Language: |
English |
| Relation: |
http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.483.3010; http://home.bi.no/a0310125/memo2605_rev.pdf |
| Availability: |
http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.483.3010; http://home.bi.no/a0310125/memo2605_rev.pdf |
| Rights: |
Metadata may be used without restrictions as long as the oai identifier remains attached to it. |
| Accession Number: |
edsbas.95DB447A |
| Database: |
BASE |