The purpose of this paper is to implement theoretically, the empirical observation that the relative importance of fundamental versus technical analysis in the foreign exchange market depends on the planning horizon. For shorter planning horizons, more weight is placed on technical analysis, while more weight is placed on fundamental analysis for longer planning horizons. The theoretical framework is the Dornbusch (1976) overshooting model. The perfect foresight path near long-run equilibrium is derived, and it is shown that the magnitude of exchange rate overshooting is larger than in the Dornbusch (1976) model. Specifically, the extent of overshooting depends inversely on the planning horizon.
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Paper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number
605.
Length: 20 pages Date of creation: 14 Feb 2003 Date of revision: Handle: RePEc:hhs:umnees:0605
Contact details of provider: Postal: Department of Economics, Umeå University, S-901 87 Umeå, Sweden Phone: 090 - 786 61 42 Fax: 090 - 77 23 02 Email: Web page: http://www.econ.umu.se/ More information through EDIRC
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Find related papers by JEL classification: E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy F31 - International Economics - - International Finance - - - Foreign Exchange F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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