First, the basic assumptions of overshoot model

1. Purchasing power parity will not be established in a short time.

2. The total supply curve is not vertical in the short term. 2. Balance adjustment process in overshoot model.

When commodity prices are sticky in the short term and exchange rate and interest rate can be freely adjusted as asset prices, in order to maintain economic balance, the adjustment range of exchange rate in the short term exceeds the long-term equilibrium level, which is called exchange rate overshoot. After adjusting the long-term price level, the economy reached a long-term equilibrium level, the price level rose in proportion to the money supply, the domestic currency exchange rate reached a long-term equilibrium level, the purchasing power parity was established, and the interest rate and output returned to the original state.

3. Evaluation of overshoot model

1. overshoot model plays an extremely important role in modern exchange rate theory.

2. The main shortcomings of overshoot model

(1) is based on monetary model's analysis and has the same defects as monetary model.

If it is assumed that the demand for money is stable; Another example is to assume that domestic and foreign assets are completely replaceable. In fact, due to the differences in transaction costs, tax treatment and various risks, the substitutability of assets between countries is far from being regarded as an asset.

(2) As a stock theory, the overshoot model ignores the analysis of the balance of payments flow. It completely attributed the fluctuation of exchange rate to the imbalance of money market, but denied the actual influence of commodity market on exchange rate, which was biased.

For reference.