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Exchange Rate Dynamics with Foreign Reserves: Revisiting the Dornbusch Overshooting Model
Author(s) -
Lee JongEun
Publication year - 2016
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/rode.12234
Subject(s) - economics , currency , exchange rate , foreign exchange reserves , monetary economics , sterilization (economics) , vulnerability (computing) , foreign exchange , monetary policy , foreign exchange market , computer security , computer science
The purpose of this study is to shed light on the management of foreign reserves that possibly have contradictory policy intentions and impacts, for instance, (1) to defend the domestic currency, (2) to depreciate the domestic currency. With this Möbius's strip‐like nature in mind, we extend the Dornbusch (1976) exchange rate overshooting model with the foreign reserves. Depending on financial vulnerability, the presence of foreign reserves could amplify or alleviate monetary policy shocks on the exchange rate.