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The timing and magnitude of exchange rate overshooting

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

No 2007,28, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank

Abstract: 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.

Keywords: Exchange rate overshooting; Partial information; Learning (search for similar items in EconPapers)
JEL-codes: E31 F31 F41 (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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Working Paper: The Timing and Magnitude of Exchange Rate Overshooting (2007) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdp1:6478

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