Monetary Policy, Foreign Exchange Policy, and Delayed Overshooting

Abstract

This paper provides an explanation for "delayed overshooting" puzzle based on foreign exchange policy's reaction to monetary policy, for Canada in which ample interactions between monetary and foreign exchange policies are found. Foreign exchange policy reaction mitigates the initial effects of monetary policy shocks on the exchange rate. As the effects of the monetary policy shocks are more prolonged than that of the foreign exchange policy reaction, the maximum effect is found in delay.

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