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...

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...