Skip to main content

Effects of Monetary Policy on the US Dollar/UK Pound Exchange Rate. Is There a “Delayed Overshooting Puzzle”?

Heinlein, Reinhold, Krolzig, Hans-Martin (2012) Effects of Monetary Policy on the US Dollar/UK Pound Exchange Rate. Is There a “Delayed Overshooting Puzzle”? Review of International Economics, 20 (3). pp. 443-467. ISSN 0965-7576. (doi:10.1111/j.1467-9396.2012.01033.x) (The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided)

The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided. (Contact us about this Publication)
Official URL
http://dx.doi.org/10.1111/j.1467-9396.2012.01033.x

Abstract

The determination of the US dollar/UK pound sterling exchange rate is studied in a small symmetric macroeconometric model including UK–US differentials in inflation, output gap, and short- and long-term interest rates for the four decades since the breakdown of Bretton Woods. The key question addressed is the possible presence of a “delayed overshooting puzzle” in the dynamic reaction of the exchange rate to monetary policy shocks. In contrast to the existing literature, we follow a data-driven modeling approach combining (i) a vector autoregression (VAR)-based cointegration analysis with (ii) a graph-theoretic search for instantaneous causal relations and (iii) an automatic general-to-specific approach for the selection of a congruent parsimonious structural vector equilibrium correction model. We find that the long-run properties of the system are characterized by four cointegration relations and one stochastic trend, which is identified as the long-term interest rate differential and that appears to be driven by long-term inflation expectations as in the Fisher hypothesis. It cointegrates with the inflation differential to a stationary “real” long-term rate differential and also drives the exchange rate. The short-run dynamics are characterized by a direct link from the short-term to the long-term interest rate differential. Jumps in the exchange rate after short-term interest rate variations are only significant at 10%. Overall, we find strong evidence for delayed overshooting and violations of uncovered interest rate parity (UIP) in response to monetary policy shocks.

Item Type: Article
DOI/Identification number: 10.1111/j.1467-9396.2012.01033.x
Additional information: number of additional authors: 1;
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculties > Social Sciences > School of Economics
Depositing User: Stewart Brownrigg
Date Deposited: 07 Mar 2014 00:05 UTC
Last Modified: 06 Feb 2020 04:09 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/40517 (The current URI for this page, for reference purposes)
Krolzig, Hans-Martin: https://orcid.org/0000-0001-8488-7048
  • Depositors only (login required):