Reassessing exchange rate overshooting in a monetary framework
Bibliographic record
Abstract
Money overtime has been deemphasized from most of the macroeconometric models of exchange rate making interest rate 'alone' the monetary policy instrument. One such model is Bjornland's (1999) Journal of International Economics and Monetary Policy and Exchange Rate Overshooting: Dornbusch was right after all. The model sets out to establish the empirical validity of Dornbusch exchange rate overshooting hypothesis for four small open economies. It does so though not with exact precision. When the same model is done using the correct econometric techniques, the impulse response functions for exchange rate due to a monetary policy shock are infact 'insignificant'. In this paper we revisit the Dornbusch exchange rate overshooting in a different model setting. A real money demand equations is added to the original model. Identification is achieved by imposing short-run and long-run restrictions while keeping the short-run interactions between the two variables monetary policy and exchange rate free. Classical neutrality of money is imposed according to which the monetary shocks are long-run neutral to certain real variables. Our paper rediscovers the validity of Dornbusch Overshooting hypothesis for Australia, Canada, Newzealand and Sweden when we compare it with Bjornland's model. More specifically, a contractionary monetary policy shock leads to exchange rate overshooting as predicted by Dornbusch. The exchange rate appreciates 'significantly' on impact to a monetary policy shock as shown by the impulse response functions and thereafter depreciates. Also the variance decomposition results justify our analysis by showing that money demand and money supply shocks explain siginificant portion of exchange rate fluctuations vis-a-vis Bjornland's original model.
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How this classification was reachedexpand
Full frame machine prediction
Teacher imitationNot calibrated prevalence, not ground truth. Human validation pending. The Gemma side is a direct model label for every work in the frame, read from the title-only record. The Codex side is a classifier learned from the 10,348 direct Codex labels and calibrated to design-weighted sample rates; fields without enough sample support carry no Codex call. Candidate is the union of the two sides; consensus is their intersection. These outputs are machine_predicted_unvalidated and are not human labels.
Distilled classifier scores by category (both heads)
| Category | Codex | Gemma |
|---|---|---|
| Metaresearch | 0.002 | 0.006 |
| Meta-epidemiology (narrow) | 0.000 | 0.000 |
| Meta-epidemiology (broad) | 0.001 | 0.001 |
| Bibliometrics | 0.001 | 0.001 |
| Science and technology studies | 0.001 | 0.002 |
| Scholarly communication | 0.004 | 0.004 |
| Open science | 0.001 | 0.002 |
| Research integrity | 0.001 | 0.002 |
| Insufficient payload (model declined to judge) | 0.002 | 0.000 |
Machine scores (provisional)
The two teacher heads of the student model, read on this work. A score orders the frame for review; it never asserts a category, and the validation status ships verbatim with every row.
Baseline scores from an immature model (maturity gate not passed, 7 training rounds). Scores rank; they never assert a category.
score_only:v0-immature-baseline · verbatim from the scoring run: score_only means the number may rank works, and no category label ships from itClassification
machine, unvalidatedMachine predicted; a candidate call from one source (direct Gemma or distilled Codex), not a consensus.
How this classification was reached, model by model and score by score, is at the end of the page under "How this classification was reached".