The Timing and Magnitude of Exchange Rate Overshooting

52 Pages Posted: 8 Jun 2016

See all articles by Mathias Hoffmann

Mathias Hoffmann

Deutsche Bundesbank

Jens Sondergaard

Capital Group International, Inc. - London Office

Niklas Johan Westelius

CUNY Hunter College - Department of Economics

Date Written: 2007

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

JEL Classification: E31, F31, F41

Suggested Citation

Hoffmann, Mathias and Søndergaard, Jens and Westelius, Niklas Johan, The Timing and Magnitude of Exchange Rate Overshooting (2007). Bundesbank Series 1 Discussion Paper No. 2007,28. Available at SSRN: https://ssrn.com/abstract=2785303

Mathias Hoffmann (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Jens Søndergaard

Capital Group International, Inc. - London Office ( email )

40 Grosvenor Place
London, England SW1X 7GG
United Kingdom

Niklas Johan Westelius

CUNY Hunter College - Department of Economics ( email )

695 Park Avenue
New York, NY 10021
United States
212-772-5433 (Phone)

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