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

they distinguish between permanent and transitory effects to identify shocks.
Kim (2001) experiments with recursive as well as non-recursive identification
schemes to analyze the international transmission of US monetary policy
shocks.

In the theoretical literature concerning monetary policy in open economy
settings there are attempts to rationalize the forward discount puzzle. E.g.
Gourinchas and Tornell (1996, 2002) explain the delayed overshooting as
the interaction of learning about the current state and the intrinsic dynamic
response of interest rates to monetary shocks. Studies like e.g. Alvarez,
Atkeson and Kehoe (2002, 2003), Chari, Kehoe and McGrattan (2000), or
Kollmann (1999) use dynamic general equilibrium models with monetary
shocks to explain the behavior of the exchange rate. We complement this
literature by introducing and empirically calculating conditional Sharpe ra-
tios for a Bayesian investor investing in a hedged position following a US
monetary policy shock.

The structure of the paper is as follows. After providing a theoretical
framework in section 2, section 3 describes our empirical approach. Section
4 reports the results and, finally, section 5 concludes.

2 Exchange Rates and Monetary Policy: Some
Theory and an Asset Pricing Perspective

Uncovered Interest Parity (UIP) and the Dornbusch overshooting model are
explained well in e.g. Obstfeld and Rogoff (1996), sections 8.2.7 and 9.2.
Here, we just provide a brief summary in order to fix notation and to provide
a framework for the empirical analysis to follow, complementing both with
an asset pricing perspective.

Importantly and as has also been emphasized by Faust and Rogers (2003),
we do not consider UIP and the overshooting hypothesis in general, but only

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