Abstract
This paper constructs a simple model of bilateral exchange rate determination in a three-country trading world. The results of the investigation indicate that exchange rate overshooting need not necessarily occur, although there is a presumption in favor of this result based on reasonable parameter values and provided that money demand functions do not exhibit great cross-country variation. The paper also reveals that increasing the number of countries is likely to diminish this presumption. It can be seen that the dynamic implications of such a disturbance are far more complex than in a one-country model.
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