A pendulum symbolizing market beliefs oscillating between equilibrium and volatility, just before the introduction of Dornbusch's overshooting model

Understanding Overshooting in Economics: The Evolution and Significance of Dornbusch’s Model

International Trade

Background on Exchange Rate Volatility Before Dornbusch’s Theory Before Rüdiger Dornbusch introduced the overshooting model, economists largely believed that markets would reach and maintain equilibrium. Some argued that exchange rate volatility was merely the result of speculative behavior or market inefficiencies (Baxter and Jermann, 2004). The general consensus leaned towards

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