Overshooting

DEFINITION of 'Overshooting'

A phenomenon in economics used to explain why exchange rates are more volatile than would be expected. Some economists had argued that volatility was purely the result of speculators and inefficiencies in the foreign exchange market. However, the overshooting model argues that the foreign exchange rate will temporarily overreact to changes in monetary policy to compensate for sticky prices in the economy. Thus, there will be more volatility in the exchange rate due to overshooting and subsequent corrections that would otherwise be expected.

BREAKING DOWN 'Overshooting'

Overshooting was introduced by German economist Rudi Dornbusch in the famous paper "Expectations and Exchange Rate Dynamics," published in 1976. The model is now widely known as the Dornbusch Overshooting Model. Although Dornbusch's model was compelling, at the time it was also regarded as somewhat radical due to its assumption of sticky prices. Today, however, sticky prices are widely accepted as fitting with empirical economic observations. Dornbusch's Overshooting Model is regarded as a forerunner to modern international economics.

RELATED TERMS
  1. Currency

    Currency is a generally accepted form of money, including coins ...
  2. Exchange Rate

    The price of a nation’s currency in terms of another currency. ...
  3. Currency Translation

    The process of quoting the amount of money denominated in one ...
  4. Foreign Currency Effects

    The gain or loss on foreign investments due to changes in the ...
  5. Currency Pair

    The quotation and pricing structure of the currencies traded ...
  6. Sticky Deal

    An issue of new securities that may present a selling challenge ...
Related Articles
  1. Forex Education

    How To Profit From Interventions In The Forex Market

    The forex market can be extremely profitable. Learn how to spot an intervention and trade when it's occurring.
  2. Forex Education

    Global Trade And The Currency Market

    Learn how the Bretton Woods system got the ball rolling for world trade.
  3. Bonds & Fixed Income

    6 Factors That Influence Exchange Rates

    Find out how a currency's relative value reflects a country's economic health and impacts your investment returns.
  4. Forex Education

    Dual And Multiple Exchange Rates 101

    Why would a country choose to implement dual or multiple exchange rates? It's risky, but it can work.
  5. Economics

    The Delicate Dance of Inflation and GDP

    Investors must understand inflation and gross domestic product, or GDP, well enough to make decisions without becoming buried in data.
  6. Economics

    Industries That Thrive On Recession

    Recessions are not equally hard on everyone. In fact, there are some industries that even flourish amid the adversity.
  7. Stock Analysis

    6 Risks International Stocks Face in 2016

    Learn about risk factors that can influence your investment in foreign stocks and funds, and what regions are more at-risk than others.
  8. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  9. Investing News

    Tufts Economists: TPP Will Reduce U.S. GDP

    According to economists at Tufts University, the TPP agreement will destroy half a million jobs in the U.S. by 2025.
  10. Economics

    Governments Ask Tech Giants to Join War on ISIS

    In the US and Israel, governments have asked their respective nations' tech industries to help in the war against ISIS.
RELATED FAQS
  1. What is comparative advantage?

    Comparative advantage is an economic law that demonstrates the ways in which protectionism (mercantilism, at the time it ... Read Full Answer >>
  2. How does the Wall Street Journal prime rate forecast work?

    The prime rate forecast is also known as the consensus prime rate, or the average prime rate defined by the Wall Street Journal ... Read Full Answer >>
  3. What's the difference between microeconomics and macroeconomics?

    Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and ... Read Full Answer >>
  4. How do you make working capital adjustments in transfer pricing?

    Transfer pricing refers to prices that a multinational company or group charges a second party operating in a different tax ... Read Full Answer >>
  5. How do mutual funds work in India?

    Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
  6. Marginal propensity to Consume (MPC) Vs. Save (MPS)

    Historically, because people in the United States have shown a higher propensity to consume, this is likely the more important ... Read Full Answer >>
Hot Definitions
  1. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  2. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
Trading Center