Burnside, A. Craig. <br/><br/>
On the Asset Market View of Exchange Rates / 
A. Craig Burnside, Jeremy J. Graveline. 
 - Cambridge, Mass.  National Bureau of Economic Research  2012. 
 - 1 online resource:  illustrations (black and white); 
 - NBER working paper series  no. w18646 .
 - Working Paper Series (National Bureau of Economic Research)  no. w18646. .
<br/><br/> December 2012. 
<br/><br/> 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. 
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