Let's consider a Mundell-Fleming model for the short-run, with flexible exchange rates. Now, if we have a monetary contraction (or expansion), the exchange rate path will differ whether we're in the presence of rational expectations or not, and if the goods market adjust slowly.
Realistically, there are empirical evidence that the goods markets adjust slowly. In this case, if the agents are not forward-looking, then there's a slow adjustment of the exchange rate until there's an equilibrium. But when the agents are rational, the expected exchange rate is immediately the equilibrium exchange rate, and with a slow adjustment from goods market, there will be an overshoot(difference between the actual exchange rate and equilibrium one) for some periods, before reaching the equilibrium. With a rapid adjustment in the goods market, the output would go immediately to equilibrium.
My question is what implications have a bigger or smaller period of overshooting/adjustment for the equilibrium exchange rate? Are there also some empirical studies on this?
Any help would be appreciated.
