An Inter-Country Approach to Analyze Effective Factors on Exchange Rate Overshooting

IF the economy is exposed to Continuous and unexpected Expansionary Monetary Policy, the exchange rate will exceed its long-run value in the short run and returns to that level again in the long-run, This is a short- run phenomenon, Stem from a lack of uniform of Adjustment speed in commodity and asset markets. Considering the destructive and harmful effects of exchange rate overshooting in the economy. In this study, the causes of the formation and effective factors on exchange rate overshooting of Iran & Organization for Economic Co-operation and Development countries using annual time series data for mentioned countries according to published statistics of World Bank, IMF and Federal Reserve by pooled model in the period 1990-2016 were investigated. Among the factors affecting exchange rate overshooting, there are variables of balance of payment, fiscal policy (government expenditures), monetary shock and oil shock which are examined in detail. In order to estimate effect of oil shock in countries surveyed, using dummy variable, the oil exporting and importing countries are divided. The results indicate a positive and significant effect of variables of fiscal policy (government expenditure), monetary shock expectations, oil shock in oil importing countries and a negative and significant effect of oil shock in oil exporting countries and balance of payments. That means, more government expenses, balance of payments deficit, monetary shock expectations and oil shock in oil importing countries will make exchange rate to overshoot or money depreciation of the country's national currency. While, oil price shock in oil exporting countries decreases exchange rate overshooting or money appreciation of the country's national currency which sign of all coefficients are fully justified according to theoretical basis of the economy.