The key features of the model include the assumptions that goods' prices are sticky, or slow to change, in the short run, but the prices of currencies are flexible, that arbitrage in asset markets holds, via the uncovered interest parity equation, and that expectations of exchange rate changes are "consistent": that is, rational.
The most important insight of the model is that adjustment lags in some parts of the economy can induce compensating volatility in others; specifically, when an exogenous variable changes, the short-term effect on the exchange rate can be greater than the long-run effect, so in the short term, the exchange rate overshoots its new equilibrium long-term value.
Dornbusch developed this model back when many economists held the view that ideal markets should reach equilibrium and stay there.
According to the model, when a change in monetary policy occurs (e.g., an unanticipated permanent increase in the money supply), the market will adjust to a new equilibrium between prices and quantities.
As a result, the foreign exchange market will initially overreact to a monetary change, achieving a new short run equilibrium.
That is to say, the position of the Investment Saving (IS) curve is determined by the volume of injections into the flow of income and by the competitiveness of Home country output measured by the real exchange rate.
If financial markets can adjust instantaneously and investors are risk neutral, it can be said the uncovered interest rate parity (UIP) holds at all times.