the rate of growth. The jump in the inflation rate can be rationalized straighforwardly as exchange-rate pass-through. Interestingly, the response of output is thus consistent with Lucas’ [30] model of price misperceptions, a transmission mechanism largely discarded in studies using U.S. data and which focus on only one possible policy shock (Christiano, Eichenbaum and Evans [8]). Finally, while the real interest rate initially falls, it starts recovering around three months after the shock as nominal interest rates increase.

As for the effects of the other monetary policy shock, an unexpected open market operation produces a significant slowdown in the rate of terms of trade growth. This fact reappears here as surprisingly as was first found out by Sims [37].<sup>18</sup> The response of output growth, on the other hand, is of the expected sign, although it is not statistically significant at conventional significance levels.<sup>19</sup> The contractionary monetary policy shock also produces an increase in interest rates, consequently there being no evidence of a _liquidity puzzle_ (Leeper and Gordon [23]). In addition, the shock has no significant effects on the price level. That inflation does not accelerate after the contractionary monetary policy shock indicates that the identification strategy also overcomes the _price puzzle_ (Sims [37], Eichenbaum [15]). That there is no evidence of the shock generating deflationary pressures, on the other hand, suggests that the deceleration in output growth could be rationalized by sticky-prices or limited participation models (Christiano et al. [8]).

On impact, the contractionary monetary policy shock produces an appreciation of the exchange rate, as has been found elsewhere in the literature for other small and open economies (Zettelmeyer [42]), and there is thus no evidence of an _exchange-rate puzzle_ in which a monetary tightening leads to an impact depreciation (Sims [37], Grilli and Roubini [17]). The ensuing depreciation of the domestic currency, although not significant at convetional significance levels, is consistent with the uncovered interest parity condition (UIPC). Under this condition, an increase in domestic interest rates relative to foreign interest rates should be followed after the impact appreciation by a persistent depreciation of the domestic currency.<sup>20</sup> As found by Kim and Roubini [21] for major industrialized countries, the rapid reversal of the impact appreciation is indeed evidence of no delayed overshooting and that the UIPC might hold. In other words, there is no evidence of a _forward discount bias puzzle_ (Eichenbaum and Evans [16], Grilli and Roubini [17]).

It is also interesting to note that in both specifications the response of the central bank’s net foreign assets holdings almost mimics the response of the demand for cur-

> 18Upong finding that a contractionary monetary policy shock reduces commodity prices in all but one of the countries studied, Sims argues that “[t]he only caveat is that it is perhaps surprising that four of these five countries’ monetary policies could all independently have such strong influences on a single international commodity price index.” (op. cit., p. 988)

> 19In the model with three lags, which impulse-response functions are not reported here, one and two months after the monetary policy shock output growth does fall significantly. The point estimate of the slowdown is of _−_ 0 _._ 79% and _−_ 0 _._ 72% annualized, respectively. The 95% confidence interval for the deceleration one month after the perturbation indicates that output growth is estimated to fall from 0 _._ 1% to 1 _._ 5% annualized. This model also displays a bounce-back effect in output growth around 5 months after the shock.

20 We sensibly assume that Argentina is an economy small enough so as not to affect foreign interest rates, and so the latter can be assumed to remain constant. Kim and Roubini [21] find that only Japan and Germany, among all non-U.S. G-7 countries, are large enough to affect world interest rates.

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