Reinvestigating the Delayed Overshooting Puzzle Using Simultaneous Confidence Regions

초록

Impulse response functions estimated by vector autoregressive (VAR) models with conventional standard-error marginal confidence intervals show gradual appreciation of local currency following a contractionary monetary shock. This empirical finding documented by Eichenbaum, Evans (1995) is termed the “delayed overshooting puzzle” since it contradicts the Dornbusch’s overshooting model (1976) based on rational expectations. This paper examines the delayed overshooting puzzle and show that the impulse responses of exchange rates and to monetary policy shocks have high serial correlation. In the presence of serial correlation in the coefficients of impulse response functions, conventional marginal confidence intervals that ignore serial correlation can be misleading measures of statistical inference about the impulse response. Jorda (2009) constructs two useful measures of simultaneous confidence intervals that account for serial correlation. This paper applies these simultaneous confidence intervals to the delayed overshooting puzzle and shows that these intervals give very different results from traditional marginal confidence intervals.

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