The overshooting hypothesis: an investigation for industrialized countries.

Abstract

In this thesis, we investigate empirically a fundamental theory in international macroeconomics the “overshooting hypothesis” for 9 industrialized countries: U.S., Euro zone, Japan, Canada, United Kingdom, South Korea, Denmark, Sweden and Norway. The theory is examined with a Structural VAR model where the identification restrictions are based on economic theory. Furthermore, we compare our results with a different identification scheme based on Cholesky decomposition. Because these 9 countries are different (e.g. some are small economies and some are large), we treat each of them separately using the same set of variables, except for U.S. which are treated as a separate case. In respect of the results, there is limited empirical support for this theory (Canada and Norway), because in most cases exchange rate displays “delayed overshooting”. A very important inference of this study is that money is not neutral.