As part of the effort to enhance our understanding of the actual movements of exchange rates under the floating exchange rate system, the purpose of this paper is to review the development of major exchange rate modeling in the past two decades and to build a better empirical model of exchange rate determination. This paper presents an empirical model of yen-dollar and mark-dollar exchange rates tested over the period from January 1976 to June 1990.
In section two, we will discuss major theories on exchange rate determination for industrial countries generated since the early 1970's to cast some light on exchange rate modeling. In section three, we discuss some of the empirical results of the theories of exchange rate determination applied to the yen-dollar and mark-dollar rates, and finally section four holds the conclusion of this paper.