Rethinking the delayed overshooting puzzle: An examination through present value framework

Abstract

This paper examines the dynamic responses of real exchange rates in several developed economies to US monetary policy shocks, with a particular focus on the delayed overshooting puzzle. Using a present value model, I decompose the real exchange rate into cash flow and discount rate components and analyze their reactions to US monetary shocks identified through high-frequency identification. The empirical findings indicate that short-term real exchange rate movements are shaped by a combination of multiple exchange rate theories, calling into question the robustness of the delayed overshooting phenomenon. In contrast, long-term dynamics are primarily driven by the discount rate component. Among the three economic models considered—the Dornbusch overshooting model, the consumption-based model, and the global risk-taking channel—the behavior of real exchange rates aligns most closely with the global risk-taking channel.