Testing for Dornbusch and Delayed Overshooting: Setting the Record Straight

Abstract

Several articles report impulse responses from policy shocks to exchange rates that never have a significant change in sign and converge to zero. Most claim that such impulse responses support some form of Dornbusch or delayed overshooting. This article shows that such impulse response functions reject overshooting from policy shocks to exchange rates. It also shows that, without additional information, such impulse responses provide no credible evidence for or against Dornbusch or delayed overshooting; that is overshooting from the policy variable itself to the exchange rate. Finally it shows that the one article that provides enough information for an appropriate test of such overshooting rejects it.