The effect of excessively elastic expectations on exchange-rate volatility in the Dornbusch overshooting model

doi:10.1016/0261-5606(83)90005-0

Journal of International Money and Finance

Volume 2, Issue 1, April 1983, Pages 39-46

https://doi.org/10.1016/0261-5606(83)90005-0 Get rights and content

Abstract

Bilson has described the empirical finding that the forward exchange rate overestimates the speed of return to equilibrium as a finding of ‘excessive speculation’, and has drawn implications for the volatility of the exchange rate. The present paper pursues this tack within the sticky-price monetary model made famous by Dornbusch. It is shown theoretically that if the market overestimates the speed of adjustment, the degree of overshooting is reduced. In this sense ‘excessive speculation’ leads to reduced volatility.

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The effect of excessively elastic expectations on exchange-rate volatility in the Dornbusch overshooting model

Abstract

J. Internat. Econ.

J. Int. Econ.

Carnegie-Rochester Conference Series on Public Policy

J. Int. Money and Finance

J. Int. Econ.

Carnegie-Rochester Conference Series on Public Policy

The Monetary Approach to the Exchange Rate—Some Empirical Evidence

IMF Staff Papers

The “Speculative Efficiency” Hypothesis

J. Business

Profitability and Stability in International Currency Markets

NBER Working Paper No. 664

Politiche Valutarie dopo Dieci Anni di Cambi Fluttuanti

Expectations and Exchange Rate Dynamics

J. Pol. Econ.

Flexible Exchange Rates and Interdependence

Exchange Rate Variability, Real and Monetary Shocks, and the Degree of Capital Mobility Under Rational Expectations

Q.J. Econ.

$Q$ .J. Econ.