NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

On the Asset Market View of Exchange Rates

A. Craig Burnside, Jeremy J. Graveline

NBER Working Paper No. 18646
Issued in December 2012
NBER Program(s):   AP   EFG   IFM

We offer a critique of the popular notion that the log-change of the real exchange rate equals the log-difference between the IMRSs of economically distinct agents in two economies. Contrary to existing claims, we show that this interpretation does not hold true in reduced-form SDF models that only rely on the absence of arbitrage in asset markets. In structural models, we show that this economic interpretation requires much stronger assumptions that emphasize the importance of goods markets rather than asset markets. We demonstrate the significance of our results for a broad range of topics in the international asset pricing literature.

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This paper was revised on August 25, 2014

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w18646

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