This paper investigates the effects of the rebalancing effect (the exchange rate sensitivity of the demand for money) in the context of the Dornbusch (1976) model of exchange rate overshooting. The model utilized hare is that of Frenkel and Rodoriguez (1982) to accommodate different degrees of capital mobility. The model also emphasizes gradual adjustment of commodity prices so that purchasing power parity holds as a long-run proposition. It will be demonstrated that the rebalancing effect unambiguously reduces exchange rate volatility regardless of the degree of capital mobility, by reducing the extent of exchange rate overshooting. [E41, F31]
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Volume (Year): 10 (1996) Issue (Month): 3 (October) Pages: 119-129 Download reference. The following formats are available: HTML
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