The dynamics of the model near long-run equilibrium, when market expectations are characterized by perfect foresight, is investigated in detail in Bask (2002). Therein, it is shown how the planning horizon and the magnitude of exchange rate overshooting depend on the structural parameters in the model.
It is also shown that the magnitude of exchange rate overshooting is larger than in Dornbusch (1976), and that the extent of overshooting depends inversely on the planning horizon. The characterization of the perfect foresight path for the model in this letter is part of future research.
By Mikael Bask
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