The paper analyses the theoretical premises for exchange rate response to changes in money stocks in an open economy.

The first part of the paper presents a critical overwiev of Dornbusch's overshooting effect. It follows from the analysis that this effect is only a particular case of exchange rate response to change in money supply. The second part of the paper proposes a new interpretation of exchange rate responses to a monetary impulse in the long run, called the inertive overshooting effect. The concept of inertive overshooting effect, together with the conclusions concerning the new level of equilibrium exchange rate after a monetary shock are based on the idea of dynamic payments equilibrium, involving partial disequilibria and feedbacks. The third part of the paper introduces the concept of currency market "trembling", which accounts for exchange rate volatility resulting from monetary changes in the short run. Both phenomena - the inertive overshooting effect and currency market trembling - are described as the findings of interest rate parity theory are verified by confrontation with the full payments equilibrium condition.