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. Also, the extent of overshooting depends inversely on the planning horizon. The latter follows from explicitly modelling the empirical observation that, for shorter planning horizons, more weight is placed on technical analysis, while more weight is placed on fundamental analysis for longer planning horizons.

I am grateful to Karl-Gustav Lofgren for helpful comments. A research grant from the Swedish Foundation for International Cooperation in Research and Higher Education (STINT) is also gratefully acknowledged.

Prof. Mikael Bask

Umeå Economic Studies

Summary:

• Introduction

• Theoretical framework

• Expectations formations

• Formal analysis of the model

• Saddle-Path Stability

• Concluding Remarks

• References

• Appendix

• Books: Currency Market