Dornsbush revisited from an asymmetrical perspective: Evidence from G20 nominal effective exchange rates.

Summary This paper develops an asymmetrical overshooting correction autoregressive model to capture excessive nominal exchange rate variation. It is based on the widely accepted perception that open economies might prefer under-evaluation to over-evaluation of their currency so as to foster their net exports. Our approach departs from existing works by allowing the strength of the overshooting correction mechanism to differ between over-depreciations and over-appreciations. It turns out that most of monthly effective exchange rates for the G20 countries are in fact well characterized by an overshooting correction after an over-appreciation only.