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Dornbusch Was Wrong: There is no Convincing Evidence of Overshooting, Delayed or Otherwise

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  • Pippenger, John
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    Abstract

    Several articles claim that Eichenbaum and Evans (1995) shows that nominal exchange rates experience a delayed version of Dornbusch overshooting. These same articles usually claim that impulse responses similar to those in Eichenbaum and Evans are evidence of such overshooting. But Eichenbaum and Evans never claim that their evidence implies overshooting, delayed or otherwise. More importantly, impulse response functions like those in Eichenbaum and Evans do not support overshooting. Three recent articles repeat this misinterpretation of the evidence. My objective is to use those articles to illustrate how the evidence about overshooting is widely misinterpreted. What is interpreted as supporting overshooting is at least as consistent with an efficient market as it is with overshooting.

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    Bibliographic Info

    Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number qt78k0b5zw.

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    Date of creation: 13 Sep 2009
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    Handle: RePEc:cdl:ucsbec:qt78k0b5zw

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    Keywords: overshooting; exchange rates; foreign exchange markets; Social and Behavioral Sciences; Other Applied Mathematics;

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    1. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(6), pages 1161-76, December.
    2. anonymous, 2005. "The implementation of monetary policy," Monograph, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.), number 2005tiom.
    3. anonymous, 2005. "Monetary policy report to the Congress," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.), issue Spr, pages 117-142.
    4. anonymous, 2003. "Monetary policy report to the congress," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.), issue Aug, pages 351-378.
    5. Kalyvitis, Sarantis & Michaelides, Alexander, 2001. "New evidence on the effects of US monetary policy on exchange rates," Economics Letters, Elsevier, Elsevier, vol. 71(2), pages 255-263, May.
    6. Pippenger, John, 2008. "Freely Floating Exchange Rates Do Not Systematically Overshoot," University of California at Santa Barbara, Economics Working Paper Series, Department of Economics, UC Santa Barbara qt97m8z6hw, Department of Economics, UC Santa Barbara.
    7. Kim, Soyoung, 2003. "Monetary policy, foreign exchange intervention, and the exchange rate in a unifying framework," Journal of International Economics, Elsevier, Elsevier, vol. 60(2), pages 355-386, August.
    8. Almuth Scholl & Harald Uhlig, 2005. "New Evidence on the Puzzles. Results from Agnostic Identification on Monetary Policy and Exchange Rates," SFB 649 Discussion Papers, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany SFB649DP2005-037, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    9. anonymous, 2005. "Monetary policy report to the Congress," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.), issue Sum, pages 319-343.
    10. Sarantis Kalyvitis & Alexander Michaelides, 2001. "New evidence on the effects of US monetary policy on exchange rates," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 197, London School of Economics and Political Science, LSE Library.
    11. anonymous, 2005. "Monetary policy and the economy," Monograph, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.), number 2005mpat.
    12. Jaehun Chung & Yongmiao Hong, 2007. "Model-free evaluation of directional predictability in foreign exchange markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 22(5), pages 855-889.
    13. Kim, Soyoung, 2005. "Monetary Policy, Foreign Exchange Policy, and Delayed Overshooting," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 37(4), pages 775-82, August.
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