section-ho7 - Econ 165 Winter 2002-03 SECTION 7 February...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Econ 165 Stanford University Winter 2002-03 TA: Kanda Naknoi SECTION 7 February 27, 2003 Exchange rate overshooting Overshooting is short-run excessive movement in exchange rates. It happens because of “difference of speed of adjustment across markets.” To be specific, price is sticky in goods market . But price adjusts instantaneously in financial markets (money markets and foreign exchange markets, in this context). In fact, agents know that in the long run, price will increase and exchange rate will depreciate . That is the reason why the curve in foreign exchange market diagram shifts upward. The long-run equilibrium is L. Under flexible price, the economy jumps from I to L instantaneously. But with sticky price, it moves from I to S’ instantaneously, and then from S’ to L slowly, while P and i increases slowly too. Note that S is not any equilibrium, because of the change in expectation. The difference between levels of E at S’ and at L measures the degree of overshooting
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/05/2011 for the course ECM 61 taught by Professor Jackparkinson during the Summer '10 term at University of Toronto- Toronto.

Page1 / 2

section-ho7 - Econ 165 Winter 2002-03 SECTION 7 February...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online