Effects of Monetary Policy Shocks on Exchange Rate in Emerging Countries

Abstract

This study empirically investigates the effects of monetary policy shocks on the exchange rate in six emerging countries (Korea, Thailand, the Philippines, Mexico, Brazil, and Colombia). VAR models are used, wherein sign restrictions on impulse responses are imposed to identify monetary policy shocks. The empirical model reflects the small open emerging economy features. The estimation period is the recent period in which these countries adopted inflation targeting and more flexible exchange rate regimes based on the experience of advanced countries. The main findings are as follows. First, various puzzles such as the “exchange rate puzzle,” “delayed overshooting puzzle,” and “forward discount bias puzzle” are frequently found in these countries. Second, more severe puzzles are found in these emerging countries than in small open advanced countries.