ABSTRACT
Empirical models of exchange rate determination have individually failed to explain the wide currency movements observed for more than a decade. Three main reasons account for their poor performance: (1) Each model emphasizes a particular aspect of the economy with severe restrictions on the choice of explanatory variables and model specification; (2) exchange rate expectations, certainly a crucial element in the behavior of the foreign exchange market participants, are made endogenous on the basis of unrealistically strong assumptions; and (3) new information instantaneously alters expectations and thus causes unexpected changes in the exchange rate that may dominate its movements.
