The role of the forecast-generating process in assessing asset market models of the exchange rate: a non-linear case

This paper contains an assessment of three variants of the monetary approach to exchange rate determination when the dynamics of the information variables are described by a Markov switching regimes process which generates non-linear forecasts. A large information set is used and the empirical results are based on monthly data on six major US dollar exchange rates over the period 1978-90. The relevant cross-equation restrictions are tested statistically and the economic significance of the models is evaluated on the basis of appropriate volatility tests. The Markov model is compared with other popular stochastic processes.