Effects of Monetary Policy Shocks on Exchange Rate in Emerging Countries

HKIMR Working Paper No.19/2016

30 Pages Posted: 17 Jan 2017

See all articles by Soyoung Kim

Soyoung Kim

Seoul National University

Kuntae Lim

The Bank of Korea

Date Written: January 15, 2017


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

Kim, Soyoung and Lim, Kuntae, Effects of Monetary Policy Shocks on Exchange Rate in Emerging Countries (January 15, 2017). HKIMR Working Paper No.19/2016, Available at SSRN: https://ssrn.com/abstract=2899939 or http://dx.doi.org/10.2139/ssrn.2899939

Soyoung Kim (Contact Author)

Seoul National University ( email )

Seoul, 151-742
Korea, Republic of (South Korea)
+82-2-880- 2689 (Phone)

Kuntae Lim

The Bank of Korea ( email )

39, Namdaemun-ro, Jung-gu
Seoul, 04531
Korea, Republic of (South Korea)

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