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The Timing and Magnitude of Exchange Rate Overshooting

Niklas Westelius (), Mathias Hoffmann () and Jens Sondergaard

No 418, Economics Working Paper Archive at Hunter College from Hunter College Department of Economics

Abstract: Empirical evidence suggests that a monetary shock induces the exchange rate to over-shoot 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 a¤ect 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.

Keywords: Exchange rate overshooting; Partial information; Learning. (search for similar items in EconPapers)
JEL-codes: F41 F31 E31 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-mon
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