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Delayed Overshooting: The Case for Information Rigidities

Author

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  • Gernot J. Müller
  • Martin Wolf
  • Thomas Hettig

Abstract

We provide evidence that the delayed overshooting puzzle reflects a slow adjustment of exchange rate expectations to monetary policy shocks rather than a failure of uncovered interest parity. Consistent with this evidence, we put forward a New Keynesian model in which uncovered interest parity holds, but there are information rigidities: investors do not observe monetary policy shocks but learn rationally from unanticipated shifts in monetary policy about the state of the economy. We estimate the model and find it can account for the joint responses of the spot exchange rate, forward exchange rates, and excess currency returns to monetary policy shocks.

Suggested Citation

  • Gernot J. Müller & Martin Wolf & Thomas Hettig, 2024. "Delayed Overshooting: The Case for Information Rigidities," American Economic Journal: Macroeconomics, American Economic Association, vol. 16(3), pages 310-342, July.
    • Handle: RePEc:aea:aejmac:v:16:y:2024:i:3:p:310-42
    DOI: 10.1257/mac.20210212
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    Citations

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    Cited by:

    1. Kerstin Bernoth & Helmut Herwartz & Lasse Trienens, 2024. "Interest Rates, Convenience Yields, and Inflation Expectations: Drivers of US Dollar Exchange Rates," Discussion Papers of DIW Berlin 2100, DIW Berlin, German Institute for Economic Research.
    2. Khalil, Makram & Strobel, Felix, 2024. "US trade policy and the US dollar," Journal of International Economics, Elsevier, vol. 151(C).

    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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