What does the overshooting model explain?

The overshooting model argues that the foreign exchange rate will temporarily overreact to changes in monetary policy to compensate for sticky prices of goods in the economy. Thus, there will be more volatility in the exchange rate due to overshooting and subsequent corrections than would otherwise be expected.

What is Dornbusch overshooting model?

The overshooting model, or the exchange rate overshooting hypothesis, first developed by economist Rudi Dornbusch, is a theoretical explanation for high levels of exchange rate volatility. Dornbusch developed this model back when many economists held the view that ideal markets should reach equilibrium and stay there.

What causes the nominal exchange rate to overshoot in the overshooting model?

The exchange rate is said to overshoot when its immediate response to a disturbance is greater than its long-run response. Changes in price levels are less volatile, suggesting that price levels change slowly.

What is exchange rate overshooting?

The term overshooting indicates the excessive fluctuation of the nominal exchange rate in response to a change in the monetary supply. This phenomenon, first defined by Dornbusch (1976) and due to price stickiness, contributes to explaining the high volatility displayed by nominal exchange rates.

What is an example of overshooting?

Examples of overshoot in a Sentence The plane overshot the runway. Sometimes we overshoot our time limits.

What causes overshooting?

Usage: Overshoot occurs when the transitory values exceed final value. When they are lower than the final value, the phenomenon is called “undershoot”. A circuit is designed to minimize risetime while containing distortion of the signal within acceptable limits. Overshoot represents a distortion of the signal.

What is the problem with overshooting?