Technical Trading at the Currency Market Increases the Overshooting Effect

It is shown in this letter that the magnitude of exchange rate overshooting is larger than in Dornbusch (1976) when chartists are introduced into the model. Specifically, the extent of overshooting depends inversely on the planning horizon. The latter follows from explicitly modelling the behavior of practitioners: for shorter planning horizons, more weight is placed on technical analysis, while more weight is placed on fundamental analysis for longer planning horizons.