Structural breaks in Taylor rule based exchange rate models - Evidence from threshold time varying parameter models

- A recent econometric methodology is applied to eleven currencies vis-à-vis the US dollar.
- The model yields more precise density predictions for all currencies under consideration.
- During the recent financial crisis our framework delivers accurate predictions.
- We find pronounced accuracy gains during the recent period of the zero lower bound.

In this note we develop a Taylor rule based empirical exchange rate model for eleven major currencies that endogenously determines the number of structural breaks in the coefficients. Using a constant parameter specification and a standard time-varying parameter model as competitors reveals that our flexible modeling framework yields more precise density forecasts for all major currencies under scrutiny over the last 24 years.