Chapter 9: A Meta Model Analysis of Exchange Rate Determination^*

A novel approach to modeling exchange rates is presented based on a set of models distinguished by the drivers of the rate and regime duration. The models are combined into a “meta model” using model averaging and non-nested hypothesis-testing techniques. The meta model accommodates periods of stability and slowly evolving or abruptly changing regimes involving multiple drivers. Estimated meta models for five exchange rates provide a compelling characterization of their determination over the last 40 years or so, identifying “phases” during which the influences from policy and financial market responses to news succumb to equilibrating macroeconomic pressures and vice versa.