Effects of Monetary Policy Shocks on Exchange Rate in Emerging Countries

30 Pages Posted: 17 Jan 2017 Last revised: 5 Aug 2022

Date Written: January 15, 2017

Abstract

This working paper was written by Soyoung Kim (Department of Economics and Seoul National University) and Kuntae Lim (Bank of Korea).


This study empirically investigates the effects of monetary policy shocks on the exchange rate in six emerging countries (Korea, Thailand, the Philippines, Mexico, Brazil, and Colombia). VAR models are used, wherein sign restrictions on impulse responses are imposed to identify monetary policy shocks. The empirical model reflects the small open emerging economy features. The estimation period is the recent period in which these countries adopted inflation targeting and more flexible exchange rate regimes based on the experience of advanced countries. The main findings are as follows. First, various puzzles such as the “exchange rate puzzle,” “delayed overshooting puzzle,” and “forward discount bias puzzle” are frequently found in these countries. Second, more severe puzzles are found in these emerging countries than in small open advanced countries.

Keywords: VAR, Monetary Policy Shocks, Exchange Rate, UIP Condition, Delayed Overshooting

JEL Classification: F3, E5

Suggested Citation

Institute for Monetary and Financial Research, Hong Kong, Effects of Monetary Policy Shocks on Exchange Rate in Emerging Countries (January 15, 2017). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 19/2016, Available at SSRN: https://ssrn.com/abstract=2899939 or http://dx.doi.org/10.2139/ssrn.2899939

Hong Kong Institute for Monetary and Financial Research (Contact Author)

(HKIMR) ( email )

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