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Dornsbush revisited from an asymmetrical perspective: Evidence from G20 nominal effective exchange rates

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  • Frédérique Bec

    (THEMA - Théorie économique, modélisation et applications - UCP - Université de Cergy Pontoise - Université Paris-Seine - CNRS - Centre National de la Recherche Scientifique, Centre de Recherche en Économie et STatistique (CREST))

  • Mélika Ben Salem

    (ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEM - Université Paris-Est Marne-la-Vallée - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12)

Abstract

This paper develops an asymmetrical overshooting correction autoregressive model to capture excessive nominal exchange rate variation. It is based on the widely accepted perception that open economies might prefer under-evaluation to over-evaluation of their currency so as to foster their net exports. Our approach departs from existing works by allowing the strength of the overshooting correction mechanism to differ between over-depreciations and over-appreciations. It turns out that most of monthly effective exchange rates for the G20 countries are in fact well characterized by an overshooting correction after an over-appreciation only.

Suggested Citation

  • Frédérique Bec & Mélika Ben Salem, 2019. "Dornsbush revisited from an asymmetrical perspective: Evidence from G20 nominal effective exchange rates," Working Papers hal-02318767, HAL.
    • Handle: RePEc:hal:wpaper:hal-02318767
    Note: View the original document on HAL open archive server: https://hal.science/hal-02318767
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    References listed on IDEAS

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    1. Chang‐Jin Kim & James Morley & Jeremy Piger, 2005. "Nonlinearity and the permanent effects of recessions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(2), pages 291-309.
    2. Bec, Frédérique & Bouabdallah, Othman & Ferrara, Laurent, 2014. "The way out of recessions: A forecasting analysis for some Euro area countries," International Journal of Forecasting, Elsevier, vol. 30(3), pages 539-549.
    3. Kenneth Rogoff, 2002. "Dornbusch's Overshooting Model After Twenty-Five Years International Monetary Fund's Second Annual Research Conference Mundell-Fleming Lecture," IMF Staff Papers, Palgrave Macmillan, vol. 49(Special i), pages 1-34.
    4. Bjørnland, Hilde C., 2009. "Monetary policy and exchange rate overshooting: Dornbusch was right after all," Journal of International Economics, Elsevier, vol. 79(1), pages 64-77, September.
    5. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2008. "Evaluating an estimated new Keynesian small open economy model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2690-2721, August.
    6. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    7. Friedman, Milton, 1993. "The "Plucking Model" of Business Fluctuations Revisited," Economic Inquiry, Western Economic Association International, vol. 31(2), pages 171-177, April.
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    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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