Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/174464
Authors: 
Capistrán Carmona, Carlos
Chiquiar, Daniel
Hernández, Juan R.
Year of Publication: 
2017
Series/Report no.: 
Working Papers 2017-11
Abstract: 
In this paper we use data from Mexico to identify Dornbusch's (1976) exchange rate overshooting hypothesis. We specify and estimate a structural cointegrated VAR that considers explicitly the presence of a set of long-run theoretical relations on macroeconomic variables (a purchasing power parity, an uncovered interest parity, a money demand, and a relation between domestic and U.S. output levels). We then impose a recursiveness assumption to identify the response of domestic variables to a monetary policy shock. The long-run restrictions embedded in the model are themselves identified, estimated, and tested using an ARDL methodology that is robust to the degree of persistence of the time series and, in particular, to whether they are trend- or first-difference stationary. With this approach, we are able to find that the response of the exchange rate to monetary policy shocks is consistent with Dornbusch's model.
Subjects: 
Vector error correction models
exchange rate overshooting
monetary policy shock
JEL: 
C32
C51
E10
E17
Document Type: 
Working Paper
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