Delayed Overshooting: It's an 80s Puzzle
37 Pages Posted: 13 Sep 2014
Date Written: September 5, 2014
We re-investigate the delayed overshooting puzzle. We find that delayed overshooting is primarily a phenomenon of the 1980s when the Fed was under the chairmanship of Paul Volcker. Related findings are as follows: (1) Uncovered interest parity fails to hold during the Volcker era and tends to hold in the other periods considered. (2) US monetary policy shocks have substantial impacts on exchange rate variations but misleadingly appear to have small impacts when monetary policy regimes are pooled. In brief, we confirm Dornbusch’s overshooting hypothesis.
Keywords: delayed overshooting, UIP, Dornbusch overshooting hypothesis, Volcker, monetary policy regime
JEL Classification: F31, E52, E65
Suggested Citation: Suggested Citation