| Sumario: | The task of this paper was to provide an example of one possible source of exchange rate overshooting in the popular monetary framework derived from the Cagan equation. The source we examined, international saving, draws from Genberg and Kierzkowski [8] via Kouri [9]. Saving has much in common with other previously mentioned work in this area in that some economic variable, aggregate equity holding in this model, cannot be fully adjusted immediately. Except for the paper by Niehans [13], that which is common to the overshooting literature is the assumption that the process of asset market clearing is very fast relative to the processes of clearing other markets or of saving combined with the recognition that exchange rates are asset prices. Since goods prices and the level of wealth enter asset demand functions but cannot adjust quickly to take up part of the burden of asset market clearing, exchange rates and interest rates must, in the short run, bear the brunt of the adjustments required for asset balance. Through time however other variables are free to adjust consequently reducing the longer run impact of disturbances on exchange rates.
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