This paper estimates SVARs for four small and three large economies. Sign restrictions are used to identify all the shocks in the SVARs, while being agnostic about the sign of the response of the real exchange rate to a relative monetary policy shock. The large number of sets of impulse responses to be judged by sign restrictions for either retention or rejection is generated by a newly proposed method which utilizes instrumental variable estimation. The responses show an absence of an exchange rate puzzle in each economy. The peak appreciation following a contractionary monetary policy shock occurs with at most a one quarter delay in the small countries and, for the United States, on impact. For the Euro region and Japan, the peak appreciation is in the long run. There is considerable model uncertainty in the responses.
Bibliographical noteFunding Information:
We thank Adrian Pagan for detailed remarks, and Geoffrey Kingston and Helmut Lütkepohl for helpful discussion. We also thank two anonymous referees of the journal for constructive comments that improved the paper. Any errors or omissions are our own. The first author thanks the Australian Research Council (Grant DP120102239 ) for financial support and the School of Economics at Yonsei University for its hospitality. The second author thanks the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea ( NRF-2015S1A5A2A01010187 ) for funding.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics