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The overshooting model, or the exchange rate overshoot hypothesis, first developed by economist Rudi Dornbusch, is a theoretical explanation for high levels of exchange rate volatility.
Nov 29, 2001 · Rudiger Dornbusch's masterpiece, "Expectations and Exchange Rate Dynamics" was published twenty-five years ago in the Journal of Political Economy, in 1976. The "overshooting" paper-as everyone calls it-marks the birth of modern international macroeconomics.
Title: Dornbusch's Overshooting Model After Twenty-Five Years - WP/02/39 Created Date: 3/4/2002 4:16:21 PM
Dec 30, 2016 · This Mundell Fleming lecture at the International Monetary Fund’s 2001 annual research conference marks the 25th anniversary of Rudiger Dornbusch’s masterpiece, “Expectations and Exchange Rate Dynamics,” a seminal contribution to both policy and research in the field of international finance.
- Kenneth S. Rogoff
- 2002
- Forward Discount Puzzle
- Dornbusch Overshooting Model Assumptions
- Dornbusch Overshooting Model Definition
The forward discount puzzlerefers to the empirical observation that currencies with higher interest rates than other countries have appreciating currencies. This goes again the uncovered interest rate parity, which argues that these countries’ currencies should depreciate.
The Dornbusch exchange rate model holds under the following set of assumptions: 1. a small open economy 2. Exchange rates are flexible, that is, no capital controls or fixed exchange rates 3. Sticky prices in the goods market (key assumption) 4. Rational expectations
According to Dornbusch’s model, when a there is a change to a country’s monetary policy (e.g. and interest rate decrease), then markets will adjust to the new equilibrium. Because prices are sticky however, a new short-run equilibriumwill be reached first financial markets. This equilibrium, however, is based on the old goods prices that are sticky...
Dec 23, 2023 · Overshooting was introduced to the world by Rüdiger Dornbusch, a renowned German economist focusing on international economics, including monetary policy, macroeconomic development, growth,...
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