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Sticky Prices and Alternative Monetary Feedback Rules: How Robust is the Overshooting Phenomenon?

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  • Bernd Kempa
  • Michael Nelles

Abstract

The present paper incorporates a mechanism of rules-based central-bank interventions into a Dornbusch-type framework. We show that the implied reactions of exchange rates and interest and interest rate differentials in response to a monetary shock depend crucially on the particular monetary policy feedback rule. The Dornbusch case of postively correlated and overshooting nominal and real exchange rates as well as nominal and real interest rate differentials is only one of the possible scenarios of our model. Different scenarios imply zero and negative correlations and even multiple overshooting. [E58, F31, F41]

Suggested Citation

  • Bernd Kempa & Michael Nelles, 1999. "Sticky Prices and Alternative Monetary Feedback Rules: How Robust is the Overshooting Phenomenon?," International Economic Journal, Taylor & Francis Journals, vol. 13(3), pages 1-18.
    • Handle: RePEc:taf:intecj:v:13:y:1999:i:3:p:1-18
    DOI: 10.1080/10168739900000001
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    References listed on IDEAS

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    Cited by:

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    2. Yihui Lan, 2003. "The Long-Term Behaviour of Exchange Rates, Part II: Aspects of Exchange-Rate Economics," Economics Discussion / Working Papers 03-06, The University of Western Australia, Department of Economics.
    3. Pierdzioch, Christian, 2005. "Noise trading and delayed exchange rate overshooting," Journal of Economic Behavior & Organization, Elsevier, vol. 58(1), pages 133-156, September.
    4. Pierdzioch, Christian, 2003. "Noise Trading and the Effects of Monetary Policy Shocks on Nominal and Real Exchange Rates," Kiel Working Papers 1140, Kiel Institute for the World Economy (IfW Kiel).
    5. Christian Pierdzioch, 2007. "Households' Preferences and Exchange Rate Overshooting," International Economic Journal, Taylor & Francis Journals, vol. 21(2), pages 297-316.

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