Dornbusch Sticky Price (Overshooting) model Stupid question: What do the phi and lambda from the equations above represent?
The equations you have are equilibrium conditions, while derivation (of course) starts with the demand equation and sets demand equal to supply. Then:


$\varphi$ ($0&lt;\varphi&lt;1$) is the income elasticity of money demand - the responsiveness of demand with respect to income
$-\lambda$ ($-\lambda &lt;0$) is the interest rate semi-elasticity of money demand - the responsiveness of demand to the change in interest rates.


Semi-elasticity means that we care how much Y changes in percentages when we increase $X$ by one (increase by one, not by one percentage point).