Real Exchange Rate Volatility and Asset Market Structure

,, examine ,the influence of financial asset market structure for the volatility of the real exchange rate. Two-country models with low elasticities of substitution between home and foreign-producedtraded goods, or models with non-traded distribution costs have been shown,yield realistic levels of terms of trade and real exchange ,rate volatility. We argue ,that incomplete financial markets are a necessary condition for the terms of trade and real exchange rate to display realistic levels of volatility. We also illustrate that for some parameter values, how one models incomplete markets also matters for international