The Overshooting Model of Exchange Rate Determination | Chapter 6 | Current Perspective to Economics and Management Vol. 1
This work aims to
examine and test another model of exchange determination, the exchange rate
overshooting model by examining its dynamics and measuring the speed of
adjustment of prices. Then, in this overshooting model it is assumed that
prices are sticky; thus, there is gradual adjustment of prices after a monetary
shock. If the prices are adjusted instantaneously, it will fall to the
monetarist view; otherwise, to the overshooting one, due to slow adjustment of
prices and consequently, a monetary shock affects all the other variables and
slowly the exchange rate. On the one hand, this study outlines, here, an
approach of testing the dynamic models of exchange rate determination. This
approach is based upon the idea that it is difficult to measure directly the
process by which market participants revise their expectations about current
and future money supplies. On the other hand, it is possible to make indirect
inferences about these expectations through a time series analysis of related
financial and real prices. Empirical tests of the above exchange rate dynamics
are taking place for four different exchange rates ($/€, $/£, C$/$, and ¥/$).
Theoretical discussion and empirical evidence have emphasised the impact of
gradual adjustment and “overshooting” that it is taking place. Only for the $/€
exchange rate, the monetarist model is correct. This is an indication that
there is price control (price inertia) in countries that have less market
oriented economies.
Author(s) Details
Dr. Ioannis N. Kallianiotis
Economics/Finance Department, The Arthur J. Kania School of Management, University of Scranton, Scranton, PA 18510-4602, U.S.A.
Economics/Finance Department, The Arthur J. Kania School of Management, University of Scranton, Scranton, PA 18510-4602, U.S.A.
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