Monetary-policy with overshooting exchange-rates

Abstract

The advent of floating exchange rates has meant that international monetary theory has been subject to continuous testing. Using Switzerland as the example of a small open economy (SOE), three issues are considered. First, long-ruri propositions such as purchasing power parity are examined and found to be broadly supported by the evidence. Secondly, the overshooting of exchange rates is analysed and it is concluded that, while consistent with rational behaviour of money holders, it may be a serious problem for SOEs. Finally, the policy implications of recent experience are analysed.