Hungarian economists take on ‘delayed overshoot' puzzle
Spike in carry trade activity cannot be proven to affect longer-term exchange rate dynamics
A protracted appreciation of the exchange rate following an interest rate hike – the so-called ‘delayed overshooting puzzle' – cannot be explained by carry trade activity, which spikes immediately after an interest rate shock.
In Carry Trade, Uncovered Interest Parity and Monetary Policy, Central Bank of Hungary economists Dániel Felcser and Balázs Vonnák point out that many authors find interest rate dynamics following an interest rate hike "is in contradiction with traditional theory of
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