Large depreciations in real exchange rates have different effects on the economy, with immediate balance sheet impacts and delayed expenditure switching effects. Overshooting in the early stages of depreciation is driven by the balance sheet effect, indicating a stronger impact on the economy. Factors like high external debt and low reserves contribute to overshooting. The balance sheet effect leads to output losses post-depreciation, while expenditure switching effects take longer to strengthen. This suggests that real exchange rate overshooting can signal the strength of the balance sheet effect and its consequences on the economy.