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- Overshooting_model abstract "The overshooting model or the exchange rate overshooting hypothesis, first developed by economist Rudi Dornbusch, is a theoretical explanation for high levels of exchange rate volatility. The key features of the model include the assumptions that goods' prices are sticky, or slow to change, in the short run, while the prices of currencies are flexible, that arbitrage in asset markets holds, via the uncovered interest parity equation, and that expectations of exchange rate changes are \"consistent\" — that is, rational. The most important insight of the model is that adjustment lags in some parts of the economy can induce compensating volatility in others; specifically, when an exogenous variable changes, the short-run effect on the exchange rate can be greater than the long-run effect, so that in the short run the exchange rate overshoots its new equilibrium long-run value. Dornbusch developed this model back when many economists held the view that ideal markets should reach equilibrium and stay there. Volatility in a market, from this perspective, could only be a consequence of imperfect or asymmetric information or adjustment obstacles in that market. Rejecting this view, Dornbusch argued that volatility is in fact a far more fundamental property than that.According to the model, when a change in monetary policy occurs (e.g., an unanticipated permanent increase in the money supply), the market will adjust to a new equilibrium between prices and quantities. Initially, because of the \"stickiness\" of prices of goods, the new short run equilibrium level will first be achieved through shifts in financial market prices. Then, gradually, as prices of goods \"unstick\" and shift to the new equilibrium, the foreign exchange market continuously reprices, approaching its new long-term equilibrium level. Only after this process has run its course will a new long-run equilibrium be attained in the domestic money market, the currency exchange market, and the goods market.As a result, the foreign exchange market will initially overreact to a monetary change, achieving a new short run equilibrium. Over time, goods prices will eventually respond, allowing the foreign exchange market to dissipate its overreaction, and the economy to reach the new long run equilibrium in all markets.".
- Overshooting_model thumbnail Dornbusch1.jpg?width=300.
- Overshooting_model wikiPageExternalLink 112901.htm.
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- Overshooting_model wikiPageRevisionID "700278997".
- Overshooting_model wikiPageWikiLink Arbitrage.
- Overshooting_model wikiPageWikiLink Category:Economics_models.
- Overshooting_model wikiPageWikiLink Category:International_economics.
- Overshooting_model wikiPageWikiLink Category:Open_economy_macroeconomics.
- Overshooting_model wikiPageWikiLink Effective_exchange_rate.
- Overshooting_model wikiPageWikiLink Exchange_rate.
- Overshooting_model wikiPageWikiLink Exogeny.
- Overshooting_model wikiPageWikiLink File:Dornbusch1.jpg.
- Overshooting_model wikiPageWikiLink Foreign_exchange_market.
- Overshooting_model wikiPageWikiLink Information_asymmetry.
- Overshooting_model wikiPageWikiLink Interest_rate_parity.
- Overshooting_model wikiPageWikiLink International_Monetary_Fund.
- Overshooting_model wikiPageWikiLink Rational_expectations.
- Overshooting_model wikiPageWikiLink Rudi_Dornbusch.
- Overshooting_model wikiPageWikiLinkText "Overshooting model".
- Overshooting_model wikiPageWikiLinkText "exchange rate overshooting".
- Overshooting_model wikiPageWikiLinkText "overshooting model".
- Overshooting_model wikiPageWikiLinkText "overshooting".
- Overshooting_model wikiPageUsesTemplate Template:Cite_journal.
- Overshooting_model wikiPageUsesTemplate Template:Macroeconomics.
- Overshooting_model subject Category:Economics_models.
- Overshooting_model subject Category:International_economics.
- Overshooting_model subject Category:Open_economy_macroeconomics.
- Overshooting_model hypernym Explanation.
- Overshooting_model type Book.
- Overshooting_model type Page.
- Overshooting_model type Redirect.
- Overshooting_model type Relation.
- Overshooting_model comment "The overshooting model or the exchange rate overshooting hypothesis, first developed by economist Rudi Dornbusch, is a theoretical explanation for high levels of exchange rate volatility.".
- Overshooting_model label "Overshooting model".
- Overshooting_model sameAs Q7113966.
- Overshooting_model sameAs Overshooting.
- Overshooting_model sameAs m.0ckc97.
- Overshooting_model sameAs Mô_hình_tỷ_giá_tăng_quá_mức.
- Overshooting_model sameAs Q7113966.
- Overshooting_model wasDerivedFrom Overshooting_model?oldid=700278997.
- Overshooting_model depiction Dornbusch1.jpg.
- Overshooting_model isPrimaryTopicOf Overshooting_model.