New evidence on the puzzles : Results from agnostic identification on monetary policy and exchange rates

Past empirical research on monetary policy in open economies has found evidence of the ‘delayed overshooting puzzle’ and the ‘forward discount puzzle’. We revisit the effects of monetary policy on exchange rates by applying Uhlig's [Uhlig, H., 2005a. What are the effects of monetary policy on output? Results from an agnostic identification procedure. Journal of Monetary Economics 52(2), 381–419.] identification procedure that involves sign restrictions on the impulse responses of selected variables. In a first step, we leave the response of the exchange rate agnostically open and find sizeable evidence for both puzzles. In a second step, we additionally rule out the delayed overshooting by construction. Our results indicate that the forward discount puzzle is robust even without delayed overshooting.