Overshooting Meets Inflation Targeting

Jose De Gregorio and Eric Parrado ()

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: This paper revisits Dornbusch’s overshooting model; first, to discuss the conditions of overshooting and undershooting, extending the model to consider monetary policy rules and imperfect capital mobility. And second, to outline Dornbusch’s representation in the context of a simple dynamic neo-Keynesian model that can be used to analyze the impact of persistent changes in monetary policy, among other shocks. The model considers inflation targeting in a small open economy setup, which is characterized by imperfect competition and short-run price rigidity. The main findings of the paper are consistent with the original contribution where the exchange rate overshoots its long run equilibrium. We also show that flexible exchange rates dominate managed exchange rates in terms of output and inflation volatility in the presence of real shocks, while for nominal shocks the reverse is true.

Date: 2006-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://www.bcentral.cl/documents/33528/133326/DTBC_394.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:394

Access Statistics for this paper

More papers in Working Papers Central Bank of Chile from Central Bank of Chile Contact information at EDIRC.
Bibliographic data for series maintained by Alvaro Castillo ().