Exchange Rate Dynamics under Financial Market Frictions

Hyunjoo Ryou () and Cristina Terra

No 2015-03, Thema Working Papers from THEMA (Théorie Economique, Modélisation et Applications), CY Cergy-Paris University, ESSEC and CNRS

Abstract: This paper extends Dornbusch's overshooting model by proposing a generalized interest parity condition (GIP), which captures a sluggish adjustment on the asset market. The exchange rate model under the GIP is able to reproduce the delayed overshooting and the hump-shaped response to monetary shocks of both nominal and real exchange rates. Furthermore, we present empirical results for OECD member countries which fit the theoretical predictions.

Keywords: Exchange rates; Interest rate parity; Overshooting; Purchasing power parity puzzle; Monetary policy (search for similar items in EconPapers)
JEL-codes: E52 F31 F41 F47 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-mac, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:ema:worpap:2015-03

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