8 THE DORNBUSCH EXCHANGE RATE OVERSHOOTING MODEL
In Chapter 7 we studied how the dynamics between macro-level monetary policy and individual agents’ expectations play a central role in understanding inflation and different hyperinflationary scenarios. In this chapter, we extend the analysis further to study the complex dynamics of exchange rates in an open economy context. Here we consider one of the most influential papers in the field of international economics: Expectations and exchange rate dynamics by Rudiger Dornbusch published in the Journal of Political Economy in 1976 [1]. The paper was written in the context when the developed countries in the western world had just made the transition from fixed to ...
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