I found this blog post about Overshooting Exchange Rates. It helped me try and figure this out for a problem set that I had.
It is kind of interesting, but a bit confusing. If you’ve taken an economics class, you have probably heard the phrase “sticky prices”. This is due to contracts and the reaction time of pricing schemes. One thing that I am learning is that exchange rates react a lot faster than prices. In some ways, exchange rates are like an ‘on’ and ‘off’ switch. Understanding how the rates are changing and reacting will affect investment decisions. The strange thing is that investor expectations have a lot to do with the actual exchange rate. So the exchange rate will depreciate or appreciate too much because of expectations and then it will adjust to the proper level when expectations adjust.
Maybe, boring economics to some, but there has been a lot of talk about the strength/weakness of the dollar. So it seems like an important topic to consider.
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