An empirical analysis of nominal rigidities and exchange rate overshooting: an intertemporal approach

This paper develops a system of equations from a model that combines an intertemporal approach with nominal rigidities, and empirically examines for five foreign currencies if exchange rates overshoot. Exchange rate overshooting is considered as a country's idiosyncrasy that depends on characteristics of the goods produced by the country. Empirical results show that exchange rates tend to overshoot in response to the US monetary shocks and undershoot in response to foreign monetary shocks. According to the underlying framework of consumption-based intertemporal optimization, the results imply that the consumption demand is elastic for foreign goods and inelastic for the US-produced goods. Copyright © 2003 John Wiley & Sons, Ltd.