Delayed Overshooting: The Case for Information Rigidities
Journal
American Economic Journal: Macroeconomics
ISSN
1945-7707
Type
journal article
Date Issued
2024
Author(s)
Abstract
We provide evidence that the delayed overshooting puzzle reflects a slow adjustment of exchange rate expectations to monetary policy shocks rather than a failure of uncovered interest parity. Consistent with this evidence, we put forward a New Keynesian model in which uncovered interest parity holds, but there are information rigidities: investors do not observe monetary policy shocks but learn rationally from unanticipated shifts in monetary policy about the state of the economy. We estimate the model and find it can account for the joint responses of the spot exchange rate, forward exchange rates, and excess currency returns to monetary policy shocks. (JEL D83, E12, E31, E43, E52, F31)
HSG Classification
contribution to scientific community
Refereed
yes
Volume
16
Number
3
Subject(s)
Division(s)