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Financial Panic and Exchange Rate Overshooting during Currency Crises

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  • Soyoung Kim
  • Sunghyun Henry Kim

Abstract

During currency crises, some currencies depreciate more than the post-crisis exchange rate level, which can be described as exchange rate overshooting. Previous studies have claimed that a tight monetary policy, represented by an increase in the interest rate, stabilizes an exchange rate by causing currency appreciation, thereby explaining overshooting. This paper tests the hypothesis that overshooting simply reflects the overreaction of investors due to financial panic during currency crises, regardless of subsequent domestic policies. Empirical results suggest that: (1) the positive relationship between monetary tightening and the overshooting measure is very sensitive to sample selection; and (2) the measure of financial panic has a significant and positive relationship with the measure of overshooting in non-European countries.

Suggested Citation

  • Soyoung Kim & Sunghyun Henry Kim, 2007. "Financial Panic and Exchange Rate Overshooting during Currency Crises," International Economic Journal, Taylor & Francis Journals, vol. 21(1), pages 71-89.
    • Handle: RePEc:taf:intecj:v:21:y:2007:i:1:p:71-89
    DOI: 10.1080/10168730601180929
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    References listed on IDEAS

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    1. Stiglitz, Joseph E., 1999. "Lessons From East Asia," Journal of Policy Modeling, Elsevier, vol. 21(3), pages 311-330, May.
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    Cited by:

    1. Chen, Guanghua & Shen, Huizhang & Chen, Guangming & Ye, Teng & Tang, Xiangbin & Kerr, Naphtali, 2015. "A new kinetic model to discuss the control of panic spreading in emergency," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 417(C), pages 345-357.
    2. Bagnai, Alberto & Granville, Brigitte & Mongeau Ospina, Christian A., 2017. "Withdrawal of Italy from the euro area: Stochastic simulations of a structural macroeconometric model," Economic Modelling, Elsevier, vol. 64(C), pages 524-538.
    3. 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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