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Open Access Publications from the University of California

The Fragility of Overshooting

  • Author(s): Pippenger, John
  • et al.

Using VAR, a large literature claims to find evidence of some form of Dornbuschovershooting. But the evidence is fragile in the sense of Leamer. The literature uses the wrong test for overshooting, unusually narrow confidence intervals and questionable shocks. In addition, it is difficult to reconcile overshooting with the fact that daily and weekly exchangerates are approximately martingales.

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