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Delayed Overshooting Puzzle in Structural Vector Autoregression Models

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Listed:
  • K. Istrefi
  • B. Vonnak

Abstract

Some authors argue that the delayed overshooting puzzle often found in the literature is an artifact of improper identification of monetary policy shocks, like Cholesky ordering. We investigate this claim by estimating the dynamic effect of monetary policy shocks on exchange rate using various identification schemes, where the data is generated by a small open economy DSGE model. We find that, on large sample, Cholesky type of restrictions perform comparably with model-consistent sign restrictions approach and do not produce the puzzle artificially. On short samples, however, Cholesky restrictions produce a more uncertain estimate for the shape of the exchange rate than sign restrictions.

Suggested Citation

  • K. Istrefi & B. Vonnak, 2015. "Delayed Overshooting Puzzle in Structural Vector Autoregression Models," Working papers 576, Banque de France.
    • Handle: RePEc:bfr:banfra:576
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    Cited by:

    1. Castelnuovo, Efrem, 2016. "Modest macroeconomic effects of monetary policy shocks during the great moderation: An alternative interpretation," Journal of Macroeconomics, Elsevier, vol. 47(PB), pages 300-314.

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    More about this item

    Keywords

    Monetary Policy; Exchange Rate; DSGE; Vector Autoregressions; Cholesky Decomposition; Sign restrictions.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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