Question

Outline the Dornbusch model of exchange rate determination and show how it is related to the Monetarist and Mundell-Fleming model.

Answer 1

the overshooting model was first developed by Dornbusch who explained for high levels of echange rate volatility. Model concentrates on features like the assumptions that goods' prices are constant, or slow to change etc. According to the model, the position of the investment Saving curve is determined by the volume of injections into the flow of income and by the competitveness of Home country outpujt measured by the real exchange rate.

The first assumption is essentially saying that the IS Curve positions is in some way dependent on the real exchange rate.

IS = C+I+N*Q

The Doenbusch model of exchange rate determination is realted to the monetarist and mundell fleming model as MUNDELL FLEMING MODEL is based on the IS curve.