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、.~①我们‖打〈败〉了敌人。②我们‖〔把敌人〕打〈败〉了。Dornbusch'sOvershootingModelAfterTwenty-FiveYearsSecondAnnualIMFResearchConferenceMundell-FlemingLectureKennethRogoff1EconomicCounselorandDirectoroftheIMFResearchDepartmentNovember30,2001(revisedJanuary22,2002)I.IntroductionItisagreathonortopaytributeheretooneofthemostinfluentialpaperswritteninthefieldofInternationalEconomicssinceWorldWarII.RudigerDornbusch'smasterpiece,ExpectationsandExchangeRateDynamicswaspublishedtwenty-fiveyearsagointheJournalofPoliticalEconomy,in1976.Theovershootingpaper-aseveryonecallsit-marksthebirthofmoderninternationalmacroeconomics.ThereislittlequestionthatDornbusch'srationalexpectationsreformulationoftheMundell-Flemingmodelextendedthelatter'slifeforanothertwenty-fiveyears,keepingitintheforefrontofpracticalpolicyanalysis.Thislectureisdividedintothreeparts.First,IwilltrytoconveytothereaderasenseofwhyExpectationsandExchangeRateDynamicshasbeensoinfluential.Mygoalhereisnotsomuchtoofferacomprehensiveliteraturesurvey,thoughofcoursetherehastobesomeofthat.Rather,Ihopethereaderwillgainanappreciationofthepaper'senormousstatureinthefieldandwhysomuchexcitementhasalwayssurroundedit.Tothatend,IhavealsoincludedsomematerialonlifeinDornbusch'sMITclassroom.Thesecondpartofthelectureisamoredetacheddiscussionoftheempiricalevidenceforandagainstthemodel,andathumbnailsketchofthemodelitself.Thefinalsectiontouchesoncompetingnotionsofovershooting.II.TheOvershootingModelinPerspectiveOneofthefirstwordsthatcomestomindindescribingDornbusch'sovershootingpaperiselegant.Policyeconomistsareunderstandablycynicalaboutacademics'preoccupationwiththeoreticalelegance.ButDornbusch'sworkisaperfectillustrationofwhythesearchforabstractbeautycansometimesyieldalargepracticalpayoff.ItispreciselythebeautyandclarityofDornbusch'sanalysisthathasmadeitsoflexibleanduseful.Likegreatliterature,Dornbusch(1976)canbeappreciatedatmanylevels.Policymakerscanappreciateitsinsightswithoutreferencetoextensivemathematics;graduatestudentsandadvancedresearchersfoundwithinitarichlodeofsubtleties.Asecondwordtodescribetheworkispathbreaking.Iwilloffersomequantitativeevidencelater,butsufficetosayherethatliterallyscoresofPh.D.theses(includingmyown)havebuiltuponDornbusch(1976).ItisnothyperboletosaythatDornbusch'snewviewoffloatingexchangeratesreinvigoratedafieldthatwasonitswaytobecomingmoribund,usingonlydated,discreditedmodelsandmethods.Dornbusch(1976)inspiredfreshthinkingandbroughtinfreshfacesintothefield.Inpreparingthislecture,Ire-readMauriceObstfeld'ssuperbinauguralMundell-Fleminglecturefromlastyear(IMFStaffPapers,Vol.47,2001).Obstfeld'spaperspansthewholemodernhistoryofinternationalmacroeconomics,fromMeadetoNewOpenEconomyMacroeconomics,butthemainemphasisisonBobMundell'spapers.I,andperhapsmanyotherreaders,foundObstfeld'sdiscussionenlighteninginpartbecausewedonothavethesameintimateknowledgeofMundell'spapersthatwedoofDornbusch(1976).Mundell'sprofoundlyoriginalideasare,ofcourse,atthecoreofmanythingswedoinmoderninternationalfinance,andhewastheteacherofmanyimportantfiguresinthefieldincludingMichaelMussa,JacobFrenkel,andRudigerDornbusch.MundellisacreativegiantwhowasthinkingaboutasinglecurrencyinEuropebackwhenintergalactictradeseemedlikeamorerealistictopicforresearch.ButthemethodsandmodelsinMundell'spapersarenowbadlydated,andarenotalwayseasytodigestfortoday'sreader(evenifatthetimetheyseemedapictureofclaritycomparedtotheexistingstateoftheart,Meade(1951)).OneoftheremarkablefeaturesofDornbusch'spaperisthattoday'sgraduatestudentscanstilleasilyreaditintheoriginaland,asIwilldocument,manystilldo.Thereadershouldunderstandthatasnovelastheovershootingmodelwas,Dornbuschwashardlywritinginavacuum.JoAnnaGray(1976),StanleyFischer(1977),andNedPhelpsandJohnTaylor(1977)wereallworkingonclosedeconomysticky-pricerationalexpectationsmodelsataroundthesametime.StanleyBlack(1973)hadalreadyintroducedrationalexpectationstointernationalmacroeconomics.Dornbusch'sChicagoclassmateMichaelMussa(mypredecessorasEconomicCounsellorattheFund)wasalsoworkingactivelyintheareainthetime,thoughhedelayedpublicationofhismainpieceonthetopicuntilMussa(1982).TherewereotherswhowerefishinginthesamewatersasDornbuschataroundthesametime,(e.g.,HansGenbergandHenrykKierzkowski,1979).ButtheeleganceandclarityofDornbusch'smodel,anditsobviousandimmediatepolicyrelevance,putshispaperinaseparateclassfromtheotherinternationalmacroeconomicspapersofitstime.--------------------------------------------------------------------------------A.StillaUsefulPolicyToolAwordaboutNewOpenEconomyMacroeconomics,whichObstfeldsurveyedlastyear;certainlythisliteraturehascometodominatetheacademicliteratureoninternationalmacroeconomicpolicy.2Superficially,ofcourse,mostofthenewergenerationmodelsappearquitedifferentfromDornbusch'smodel,notleastbecausetheyintroducerigorousmicrofoundationsforconsumerandinvestorbehavior.Atthesametime,however,theycanbeviewedasdirectdescendants.Formally,NewOpenEconomyMacroeconomicsattemptstomarrytheempiricalsensibilityofthesticky-priceDornbuschmodelwiththeelegantbutunrealisticintertemporalap