On the Asset Market View of Exchange Rates

Craig Burnside and Jeremy J. Graveline

No 18646, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: If the asset market is complete then the difference between foreign and domestic agents' log intertemporal marginal rates of substitution (IMRSs) equals the log change in the real exchange rate. This equation is frequently used to argue that changes in real exchange rates reflect differences between agents' required compensation for exposure to asset return uncertainty. We show that the relative returns on frictionlessly traded assets are only reflected in the common component of agents' IMRSs, not differences. Instead, when this equation does offer insights, frictions in the goods market are the source of economic distinction between agents.

JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 2012-12
New Economics Papers: this item is included in nep-opm and nep-upt
Note: AP EFG IFM
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Citations: View citations in EconPapers (1)

Published as accepted at the Review of Financial Studies

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Journal Article: On the Asset Market View of Exchange Rates (2020)
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