Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/201676
Authors: 
Hauzenberger, Niko
Huber, Florian
Year of Publication: 
2018
Series/Report no.: 
Working Papers in Economics 2018-08
Abstract: 
In this paper we aim to improve existing empirical exchange rate models by accounting for uncertainty with respect to the underlying structural representation. Within a flexible Bayesian non-linear time series framework, our modeling approach assumes that different regimes are characterized by commonly used structural exchange rate models, with their evolution being driven by a Markov process. We assume a time-varying transition probability matrix with transition probabilities depending on a measure of the monetary policy stance of the central bank at the home and foreign country. We apply this model to a set of eight exchange rates against the US dollar. In a forecasting exercise, we show that model evidence varies over time and a model approach that takes this empirical evidence seriously yields improvements in accuracy of density forecasts for most currency pairs considered.
Subjects: 
Empirical exchange rate models
exchange rate fundamentals
Markov switching
JEL: 
C30
E32
E52
F31
Document Type: 
Working Paper
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