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Exchange rate overshooting is a phenomenon in international macroeconomics where the nominal exchange rate initially responds more than proportionally to changes in monetary or economic fundamentals before gradually adjusting to its long-run equilibrium. The concept was first formally explained by Rudiger Dornbusch in his influential 1976 model, which combined sticky prices in the short run with perfectly flexible exchange rates under the assumption of rational expectations. Understanding the reasons behind exchange rate overshooting requires examining the interaction between monetary policy, asset markets, and price rigidities. One primary reason for exchange rate overshooting is the presence of nominal price rigidity in the goods market. In the short run, prices of domestic goods ___ _____ __________ ________ _______ __________ _______ _______ __________.
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