In Dornbusch’s model of exchange rate determination, explain why the dynamics have the ‘saddlepoint stability’ property. How is this relevant to the result that the exchange rate ‘overshoots’, following a money supply change?
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In Dornbusch’s model of exchange rate determination, explain why the dynamics have the ‘saddlepoint stability’ property. How is this relevant to the result that the exchange rate ‘overshoots’, following a money supply change?