Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/318486 
Year of Publication: 
2025
Series/Report no.: 
Working Paper No. 125
Publisher: 
Osnabrück University, Institute of Empirical Economic Research, Osnabrück
Abstract: 
A modified dynamic model averaging framework, which allows for inferences regarding the shifting relevance and significance of explanatory variables, is employed to evaluate the in-sample performance of exchange rate models. This analysis is based on a set of 16,384 model specifications derived from 14 canonical and newly introduced explanatory variables. Our findings indicate: (a) frequent changes in the model specification that best describes an exchange rate, (b) the relevance of individual explanatory variables is not stable over time and varies across exchange rates, with these variables exhibiting differential and sometimes opposing effects, and displaying non-uniform strengths across different exchange rates and periods, (c) the combination of economic and/or financial variables that enhances the empirical evidence of purchasing power parity (PPP) is specific to each exchange rate. These results underscore the challenges associated with employing a single exchange rate model or the scapegoat hypothesis to describe all exchange rates across all time periods.
Subjects: 
Bayesian Dynamic Model Averaging
Explaining Exchange Rates
InSample Performance
Purchasing Power Parity Deviations
JEL: 
C11
F31
Document Type: 
Working Paper

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