The Dornbusch overshooting model, developed by Rudiger Dornbusch in 1976, is a theoretical framework used to explain the dynamics of exchange rates. It suggests that when there is a change in monetary policy or other economic factors, exchange rates overshoot their long-run capital flows before settling back to their equilibrium levels. The model helps explain the short-term volatility of exchange rates, which can have significant implications for international trade, investment, and capital flows.
Assumptions of the Model:The Dornbusch overshooting model is based on several key assumptions. First, it assumes that prices and wages are sticky in the short run, meaning that they do not adjust immediately to changes in economic conditions.… Read the rest