In this paper we re-consider the effects of monetary policy shocks on exchange rates and forward premia that in the empirical literature have been categorized as puzzling in that these would include delayed overshooting of the exchange rate as well as persistent deviations from (uncovered) interest parity. We specify an empirical model that in particular (i) allows for simultaneous multi-country adjustments in response to monetary policy shocks, and (ii) takes advantage of the identifying restrictions implied by long-run relations between the macroeconomic variables under consideration. Using monthly data from 1978 to 2006 for a panel of nine industrial economies (Australia, Canada, France, Germany, Italy, Japan, New Zealand, United Kingdom, and the United States), we find that U.S. effective and bilateral real exchange rates appreciate immediately after a contractionary U.S. monetary policy shock, and that there is no delayed overshooting.
Furthermore, there is no persistent significant forward premium and the price puzzle is at most weakly present. These results suggest that a dynamic stochastic general equilibrium model featuring staggered price setting, local currency pricing, home biased preferences and heterogeneous factor markets actually is consistent with the data with regards to its implications for the real exchange rate effects of monetary policy shocks.