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Exchange-Rate Overshooting: An Analysis for Intermediate Macro


  • Fidelina B. Natividad-Carlos

    (School of Economics, University of the Philippines Diliman)


While exchange rate dynamics is an important topic in open economy macroeconomics, the standard tool commonly used to introduce exchange rate dynamics - the Dornbusch (1976) seminal paper along with phase diagram - is not well-suited for undergraduate students as most of them do not have yet a background on dynamic macroeconomic analysis. This paper attempts to provide a graphical device – a panel IS*-LM* diagram – which can be used to teach intermediate macroeconomics students about Dornbusch’s idea of exchange rate dynamics. In addition, it also attempts to bridge the gap between undergraduate teaching and graduate teaching of exchange rate dynamics by showing the correspondence between the economy’s adjustment path in the IS*-LM* diagram and that in the phase diagram.

Suggested Citation

  • Fidelina B. Natividad-Carlos, 2014. "Exchange-Rate Overshooting: An Analysis for Intermediate Macro," UP School of Economics Discussion Papers 201414, University of the Philippines School of Economics.
  • Handle: RePEc:phs:dpaper:201414

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    References listed on IDEAS

    1. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, January.
    2. John Harvey, 2007. "Teaching Post Keynesian exchange rate theory," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 30(2), pages 147-168.
    3. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
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    More about this item


    undergraduate teaching; graduate teaching; exchange rates; exchange rate dynamics; sticky prices; interest parity; open economy macroeconomics; fiscal policy; monetary policy;

    JEL classification:

    • A23 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - Graduate
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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