A Note on the Theoretical Significance and Empirical Relevance of Dornbush's Overshooting Model

Abstract

The frontiers of exchange rate economics have deepened and widened thanks to the evolution of Asset Market Approach, Rational Expectations and New Classical Macro Economics. The implications of these evolving approaches and the crucial interdependence between current and capital accounts of BOP in the analyis of exchange rate determination have been increasingly realized by the profession. While Allen and Kenen's integrated approach to BOP and exchange rate theory (1980) is the best representative of Portfolio Model, Dornbusch's sticky-price over-shooting Monetary Model (1976) is a classic example of macroeconomic disequlibrium model. This paper attempts to evaluate the theoritical significance and empirical relevance of the latter.