eprintid: 27363
rev_number: 19
eprint_status: archive
userid: 3114
dir: disk0/00/02/73/63
datestamp: 2019-11-13 13:16:07
lastmod: 2020-02-26 14:06:13
status_changed: 2019-11-13 13:16:07
type: workingPaper
metadata_visibility: show
creators_name: Rüth, Sebastian K.
title: Shifts in Monetary Policy and Exchange Rate Dynamics: Is Dornbusch's Overshooting Hypothesis Intact, After all?
subjects: 330
divisions: 181000
keywords: nominal exchange rate, monetary policy shock, external instrument, structural vector autoregression
abstract: How do nominal exchange rates adjust after surprise contractions in monetary policy? While the seminal contribution by Dornbusch provides concise predictions -exchange rates appreciate, i.e., overshoot on impact before depreciating gradually - empirical support for his hypothesis is at best mixed. I argue that the failure to discover overshooting may result from assumptions researchers have imposed to recover structural VARs. Specifically, simultaneous feedback effects between interest rates and exchange rates, which are inherently forward-looking variables, are often excluded or modeled alongside with strong restrictions. In this paper, I identify U.S. monetary policy shocks using surprises in Federal funds futures around policy announcements as external instruments, which recent literature has established to represent the appropriate laboratory in settings encompassing macroeconomic and financial variables. Resulting adjustments of the dollar, conditional on shifts in policy, generally align with Dornbusch's predictions during the post-Bretton-Woods era, including Volcker's tenure as Fed Chair.
date: 2019-11
id_scheme: DOI
id_number: 10.11588/heidok.00027363
schriftenreihe_cluster_id: sr-3
schriftenreihe_order: 0673
ppn_swb: 1683318846
own_urn: urn:nbn:de:bsz:16-heidok-273636
language: eng
bibsort: RUTHSEBASTSHIFTSINMO201911
full_text_status: public
series: Discussion Paper Series / University of Heidelberg, Department of Economics
volume: 0673
place_of_pub: Heidelberg
pages: 29
citation:   Rüth, Sebastian K.  (2019) Shifts in Monetary Policy and Exchange Rate Dynamics: Is Dornbusch's Overshooting Hypothesis Intact, After all?  [Working paper]     
document_url: https://archiv.ub.uni-heidelberg.de/volltextserver/27363/3/Rueth_2019_dp673.pdf