Delayed Overshooting: Is It an ’80s Puzzle?

Abstract

We reinvestigate the delayed overshooting puzzle. Using a method of sign restrictions, we find that delayed overshooting is primarily a phenomenon of the 1980s when the Fed was under the chairmanship of Paul Volcker. Related findings are as follows: (1) Uncovered interest parity fails to hold during the Volcker era and tends to hold during the post-Volcker era; (2) US monetary policy shocks have substantial impacts on exchange rate variations but misleadingly appear to have small impacts when monetary policy regimes are pooled. In brief, we confirm Dornbusch’s overshooting hypothesis.