Abstract
I propose a general characterization of exchange rate dynamics, which decomposes the effect of market incompleteness into two components. The first component describes the pass-through from marginal utility shocks to exchange rate movements, and the second component captures additional exchange rate variations beyond marginal utility shocks. Under this framework, I show cross-country bond holdings impose tight equilibrium constraints, and produce counterfactual implications if the pass-through from marginal utility shocks to exchange rates is symmetric across countries. Therefore, asymmetry is an inherent feature of incomplete-market exchange rate dynamics, which generates novel implications for exchange rate spill-over and disconnect.
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