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Exchange Rate Overshooting And Path-Dependence In International Trade

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  • BORGERSEN, TROND-ARNE
  • GÖCKE, MATTHIAS

Abstract

This paper integrates a traditional Dornbusch 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 overshooting model.

Suggested Citation

  • Borgersen, Trond-Arne & Göcke, Matthias, 2007. "Exchange Rate Overshooting And Path-Dependence In International Trade," Macroeconomic Dynamics, Cambridge University Press, vol. 11(3), pages 295-317, June.
    • Handle: RePEc:cup:macdyn:v:11:y:2007:i:03:p:295-317_06
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    Cited by:

    1. Belarbi, Yacine & Hamdi, Fayçal & Khalfi, Abderaouf & Souam, Saïd, 2021. "Growth, institutions and oil dependence: A buffered threshold panel approach," Economic Modelling, Elsevier, vol. 99(C).
    2. Pippenger, John, 2008. "Freely Floating Exchange Rates Do Not Systematically Overshoot," University of California at Santa Barbara, Economics Working Paper Series qt97m8z6hw, Department of Economics, UC Santa Barbara.

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