The timing and magnitude of exchange rate overshooting

Arbeitspapier

Empirical evidence suggests that a monetary shock induces the exchange rate to overshoot its long-run level. The estimated magnitude and timing of the overshooting, however, varies across studies. This paper generates delayed overshooting in a new Keynesian model of a small open economy by incorporating incomplete information about the true nature of the monetary shock. The framework allows for a sensitivity analysis of the overshooting result to underlying structural parameters. It is shown that policy objectives and measures of the economy's sensitivity to exchange rate dynamic affect the timing and magnitude of the overshooting in a predictable manner, suggesting a possible rationale for the cross-study variation of the delayed overshooting Phenomenon.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Discussion Paper Series 1 ; No. 2007,28

Classification and Topics

• Classification: Wirtschaft ; Price Level; Inflation; Deflation ; Foreign Exchange ; Open Economy Macroeconomics
• Subject: Exchange rate overshooting ; Partial information ; Learning ; Overshooting ; Monetäre Wechselkurstheorie ; Geldpolitik ; Schock ; Lernprozess ; Erwartungstheorie ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hoffmann, Mathias ; Søndergaard, Jens ; Westelius, Niklas J.
• Event: Veröffentlichung
• (who): Deutsche Bundesbank
• (where): Frankfurt a. M.
• (when): 2007

Further information

• Handle: http://hdl.handle.net/10419/19705
• Last update: 2025-03-10T11:42:02+0100