On the Asset Market View of Exchange Rates

40 Pages Posted: 22 Dec 2012

See all articles by A. Craig Burnside

A. Craig Burnside

Duke University - Department of Economics; University of Glasgow - Department of Economics; National Bureau of Economic Research (NBER)

Jeremy J. Graveline

University of Minnesota - Carlson School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: December 2012

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.

Suggested Citation

Burnside, Craig and Graveline, Jeremy J., On the Asset Market View of Exchange Rates (December 2012). NBER Working Paper No. w18646, Available at SSRN: https://ssrn.com/abstract=2192819

Craig Burnside (Contact Author)

Duke University - Department of Economics ( email )

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University of Glasgow - Department of Economics

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National Bureau of Economic Research (NBER)

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Jeremy J. Graveline

University of Minnesota - Carlson School of Management ( email )

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Minneapolis, MN 55455
United States
612-626-7817 (Phone)

HOME PAGE: http://www.tc.umn.edu/~jeremy/

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