New evidence on the puzzles: Results from agnostic identification on monetary policy and exchange rates

Scholl, Almuth; Uhlig, Harald

doi:10.1016/j.jinteco.2008.02.005

Cited by 197 publications

(173 citation statements)

References 40 publications

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“…Why do our results differ from Faust and Roger (2003) and Scholl and Uhlig (2005) with regard to the response in the exchange rate? 17 Neither of these papers restrict the interaction between monetary policy and the exchange rate, but rely instead on a series of sign restrictions for identification.…”

Section: Robustness Of Resultscontrasting

confidence: 80%

“…However, the effect is not uniquely identified, so no robust conclusions can be drawn with regard to the exact timing of the peak response, which could be immediate or delayed. Similar results are also found in Scholl and Uhlig (2005), using a procedure related to that of Faust and Rogers (2003).…”

Section: Introductionsupporting

confidence: 82%

“…Instead they have found that following a contractionary monetary policy shock, the real exchange rate either depreciates, or, if it appreciates, it does so for a prolonged period of up to three years, thereby giving a 17 Obviously, some of the differences may be due to the fact that we analyse different samples and countries, but we believe that this is a less important explanation. 18 For instance, by restricting domestic prices from rising (avoiding "price puzzles" by construction), Scholl and Uhlig (2005) find instead puzzling responses in the other variables, as real output rises and the real exchange rate depreciates following a contractionary monetary policy shock. These impulse responses are hard to interpret all coming from a contractionary monetary shock, making us question whether the identified shocks could be a hybrid of shocks.…”

Section: Robustness Of Resultsmentioning

confidence: 99%

See 2 more Smart Citations

Monetary policy and exchange rate overshooting: Dornbusch was right after all

Bjørnland

2009

Journal of International Economics

133

115

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Section: Robustness Of Resultscontrasting

confidence: 80%

Section: Introductionsupporting

confidence: 82%

Section: Robustness Of Resultsmentioning

confidence: 99%

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Monetary policy and exchange rate overshooting: Dornbusch was right after all

Bjørnland

2009

Journal of International Economics

133

115

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“…1 The relation between interest rate differentials and subsequent exchange rate movements has been extensively investigated. Eichenbaum and Evans (1995), Faust and Rogers (2003), and Scholl and Uhlig (2008) conduct empirical research on the forward premium and delayed overshooting puzzles while Gourinchas and Tornell (2004) and Bacchetta and van Wincoop (2010) show that an increase in the interest rate can cause sustained exchange rate appreciation if investors either systematically underestimate the persistence of interest rate shocks or make infrequent portfolio decisions. Based on this research, we postulate the following exchange rate forecasting equation 2 : g g * ⊗et+1 = ω − ωuππt + ω fππ t * − ωuy yt + ω fy yt…”

Section: Taylor Rule Fundamentals Modelmentioning

confidence: 99%

Taylor rule deviations and out-of-sample exchange rate predictability

Ince

Molodtsova

Papell

2016

Journal of International Money and Finance

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The Taylor rule has become the dominant model for academic evaluation of out-of-sample exchange rate predictability. Two versions of the Taylor rule model are the Taylor rule fundamentals model, where the variables that enter the Taylor rule are used to forecast exchange rate changes, and the Taylor rule differentials model, where a Taylor rule with postulated coefficients is used in the forecasting regression. We use data from 1973 to 2014 to evaluate short-run out-ofsample predictability for eight exchange rates vis-à-vis the U.S. dollar, and find strong evidence in favor of the Taylor rule fundamentals model alternative against the random walk null. The evidence of predictability is weaker with the Taylor rule differentials model, and still weaker with the traditional interest rate differential, purchasing power parity, and monetary models. The evidence of predictability for the fundamentals model is not related to deviations from the original Taylor rule for the U.S., but is related to deviations from a modified Taylor rule for the U.S. with a higher coefficient on the output gap. The evidence of predictability is also unrelated to deviations from Taylor rules for the foreign countries and adherence to the Taylor principle for the U.S. A B S T R A C T Keywords:Exchange rates Out-of-sample exchange rate predictability Taylor rulesThe Taylor rule has become the dominant model for academic evaluation of out-of-sample exchange rate predictability. Two versions of the Taylor rule model are the Taylor rule fundamentals model, where the variables that enter the Taylor rule are used to forecast exchange rate changes, and the Taylor rule differentials model, where a Taylor rule with postulated coefficients is used in the forecasting regression. We use data from 1973 to 2014 to evaluate short-run out-of-sample predictability for eight exchange rates vis-à-vis the U.S. dollar, and find strong evidence in favor of the Taylor rule fundamentals model alternative against the random walk null. The evidence of predictability is weaker with the Taylor rule differentials model, and still weaker with the traditional interest rate differential, purchasing power parity, and monetary models. The evidence of predictability for the fundamentals model is not related to deviations from the original Taylor rule for the U.S., but is related to deviations from a modified Taylor rule for the U.S. with a higher coefficient on the output gap.

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“…Eichenbaum & Evans (1995) examined the period between 1974 and 1990 and found that expansionary U.S. monetary shock had initially led to an appreciation of the U.S. dollar, but which subsequently depreciated over two to three years. Scholl & Uhlig (2008) showed the existence of delayed overshooting for USA vis-à-vis the exchange rates of Germany, UK, Japan and G7 countries for the period between 1975 and 2002. Kim (2005) argued that the intervention of the central bank on foreign exchange markets is the main reason for delayed overshooting for the Canadian-US bilateral exchange rates.…”

Section: Literature Reviewmentioning

confidence: 99%