TITLE:
Testing for Dornbusch and Delayed Overshooting: Setting the Record Straight
AUTHORS:
John Pippenger
KEYWORDS:
Exchange Rates, Impulse Response, Step Response, Overshooting, Vector Autoregression
JOURNAL NAME:
Theoretical Economics Letters,
Vol.9 No.5,
June
20,
2019
ABSTRACT: Several articles report impulse responses from
policy shocks to exchange rates that never have a significant change in sign
and converge to zero. Most claim that such impulse responses support some form
of Dornbusch or delayed overshooting. This article shows that such impulse
response functions reject overshooting from policy shocks to exchange rates. It
also shows that, without additional information, such impulse responses provide
no credible evidence for or against Dornbusch or delayed overshooting; that is
overshooting from the policy variable itself to the exchange rate. Finally it
shows that the one article that provides enough information for an appropriate
test of such overshooting rejects it.