We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

In Finance, what is Overshooting?

Malcolm Tatum
By
Updated: Jan 28, 2024
Views: 8,525
Share

Overshooting is an economic phenomenon that has to do with the exchange rate. The term is used to describe both a logical chain of events that occurs in the marketplace when there is a shift in the balance between quantities and prices, as well as the manner in which an investor responds to those shifts. In both instances, the phenomenon is considered to be of short duration, with balance restored once the economy has completed all phases of the shift and accommodated to the new circumstances.

In terms of identifying overshooting in the economy, this phenomenon takes place when some type of change in monetary policy undermines the current balance between prices and quantities. For example, if the market is flooded with increased quantities, the reaction is likely to be a drop in prices. The decrease in prices may be somewhat severe at first, reaching a much lower figure. However, as the market adjusts to the new circumstances, the price is likely to increase slightly as quantities become stable once more, creating a new equilibrium. At this point, the phase of overshooting is considered complete.

This same set of changing circumstances can also trigger a reaction by investors that is identified as overshooting. In this scenario, the investor reacts to the shifts in the marketplace by working to help drive the change in exchange rate as quickly as possible. The idea is to take actions that will move the marketplace through the period of relative upheaval at a faster pace, thus restoring equilibrium to the marketplace sooner rather than later. Often, this is done in hopes of avoiding losses on investments, as well as taking advantage of temporarily low prices in order to make new acquisitions that will begin to appreciate in value as the market begins to restore the balance between quantity and price.

Many events can take place during a phase of overshooting. Refinancing of holdings such as real estate may take place. Investments may be bought and sold at an accelerated rate. The rate of prepayments on liabilities may occur, or the rate of the repayment of liabilities may slow, depending on the nature of the market shift and the effect that it has on the exchange rate. By understanding the nature of the change, including what prompted the change to take place, it is possible to determine what strategies are necessary to avoid loss during the transition and what can be done to help establish this new long-run equilibrium value to the exchange rate.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

Editors' Picks

Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
Share
https://www.wise-geek.com/in-finance-what-is-overshooting.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.