New Evidence on the Puzzles. Results from Agnostic Identification on Monetary Policy and Exchange Rates.

conditional on a monetary policy shock. A key question is: how much of a
change or deviation from UIP should one expect following a monetary policy
shock?

Thus, let sk be the impulse response of the log of the exchange rate,
understood throughout the paper to be Dollars (“home”) per unit of non-US
(“foreign”) currency. Let i_k and i^j_k be the impulse response for the US and
the foreign short term rates, respectively. This allows the calculation of the
compounded return from investing (or borrowing) at this rate from 0 to k,

k-1

Define the forward discount premium

^ρk = ^s0 ^- sk + ⁱ0→k ^{- i}0→k

which is the gain due to the monetary policy shock (compared to the baseline
scenario without that shock) from borrowing foreign currency for the k peri-
ods following the monetary policy shock at the foreign short rate, exchanging
it for Dollars, investing it at the US rate, and exchanging it back again in
period k. Note that one can write

k
ρk=   ξj

j=1

where

^ξj = sj-1 ^- sj ^{+ i}j-1 ^{- ij}-1

is the same gain when executing this hedging strategy only from periods
j - 1 to j following the shock. In particular, ρj stays flat for j ≥ j^j , if
ξj = 0 for j ≥ j^j . Note furthermore, that the reaction s₀ in the impact
period is not part of the foreign discount premium, i.e., we assume that the
investor starts the investment strategy after observing the monetary policy

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