Overshooting

When financial markets take a trend too far. For example, when a currency depreciates, investors may lose confidence and sell, driving the currency to an undervalued level. Investors may also overreact when central banks start to tighten monetary policy, driving up rate expectations further than the authorities intend. But overshooting is not always irrational or mistaken. Rudi Dornbusch, a German economist, showed that exchange rates naturally overshoot under certain conditions.