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.