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

puzzle becomes more robust than with the Grilli-Roubini recursive identifica-
tion strategy. Quantitatively, monetary policy shocks seem to have a minor
impact on exchange rate fluctuations, which is in contrast to some findings
of the previous literature.

We view these results as reconfirming a modified version of the findings
of Eichenbaum-Evans and Grilli-Roubini. In essence, their recursive identi-
fication strategy was close to correctly identifiying monetary policy shocks
with the data set they used then, even though that identification strategy no
longer seems sensible with an updated data set. Thus, the puzzling behaviour
of exchange rates is a feature of monetary policy shocks, once correctly iden-
tified. The results of Faust and Rogers (2003) are not in contrast with our
results: however, their restrictions are too weak to narrow down the range of
reasonable monetary policy shocks sufficiently, thus underscoring the point
raised in Uhligs (1998) discussion of Faust (1998).

The identification method used in this paper, introduced by Uhlig (2005),
builds on the classic paper by Leamer (1981) and its macroeconomic imple-
mentation by Blanchard (1989) and is related to work by Canova and Pina
(1999) and Canova and de Nicolo (2000) who put sign restrictions on impulse
response correlations. Like in Bernanke and Mihov (1998) the method con-
centrates on identifying only the shock of interest rather than aiming at fully
identifying the system. Other papers that impose restrictions on impulse
responses are Dwyer (1997), Faust (1998) and Gambetti (1999).

A number of papers in the empirical literature concerning monetary policy
in open economies employ structural VAR approaches to identify monetary
policy shocks instead of using a recursive ordering as Eichenbaum and Evans
(1995), Grilli and Roubini (1995, 1996) and Sims (1992) do. E.g. Kim
and Roubini (2000) model reaction functions of the monetary authorities
and the structure of the economy while Clarida and Gali (1994), Lee and
Chinn (1997) and Rogers (1999) use the Blanchard-Quah decomposition, i.e.

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