Journal article

Publication year: 2007

Pages: 295-317

Journal: Macroeconomic Dynamics

Volume number: 11

Issue number: 3

ISSN: 1365-1005

eISSN: 1469-8056

DOI Link: https://doi.org/10.1017/S1365100507060117

URL: https://www.cambridge.org/core/journals/macroeconomic-dynamics/article/exchange-rate-overshooting-and-pathdependence-in-international-trade/84AC91AF7F579BCB942A341D30C84070

Publisher: Cambridge University Press

Abstract: 
This paper integrates a traditional Dombusch overshooting model with a macro-economic model of hysteresis in foreign trade. We apply an approach which allows an aggregation of heterogeneous agents and which results in a continuous macroeconomic hysteresis-loop. In our model, short-run exchange rate overshooting generates a persistent current account effect, which feeds back into the exchange rate process and ultimately results in changes of the long-run equilibrium exchange rate. Monetary shocks can lead to hysteresis in both foreign trade and exchange rate processes, invalidating the long-run neutrality of money hypothesis and the purchasing power parity assumption of the conventional overshootin-model.

Harvard Citation style: Borgersen, T. and Göcke, M. (2007) Exchange rate overshooting and path-dependence in international trade, Macroeconomic Dynamics, 11(3), pp. 295-317. https://doi.org/10.1017/S1365100507060117

APA Citation style: Borgersen, T., & Göcke, M. (2007). Exchange rate overshooting and path-dependence in international trade. Macroeconomic Dynamics. 11(3), 295-317. https://doi.org/10.1017/S1365100507060117