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Modelling Probabilities of Devaluations


  • Gabriela Mundaca


I show why, when the realized rates of depreciation within the exchange rate band are regressed on a given information set and conditioned on ("ex post") actual no realignment ("ý la" drift adjustment), a 'peso problem' is still encountered. The reason is that the frequency of realignments in the data need not be the same as the frequency of the (even small) subjective probabilities that a realignment may take place. I suggest an alternative approach to solve the peso problem and provide consistent estimates. My estimates of the expected realignment rates are greater than the ones obtained using the drift adjustment method. Copyright (c) The London School of Economics and Political Science 2004.

Suggested Citation

  • Gabriela Mundaca, 2004. "Modelling Probabilities of Devaluations," Economica, London School of Economics and Political Science, vol. 71, pages 13-37, February.
  • Handle: RePEc:bla:econom:v:71:y:2004:i::p:13-37

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    References listed on IDEAS

    1. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, vol. 81(2), pages 232-251, August.
    2. Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1989. "Industrialization and the Big Push," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1003-1026, October.
    3. Coate, Stephen & Morris, Stephen, 1995. "On the Form of Transfers in Special Interests," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1210-1235, December.
    4. Gene M. Grossman & Henrik Horn, 1988. "Infant-Industry Protection Reconsidered: The Case of Informational Barriers to Entry," The Quarterly Journal of Economics, Oxford University Press, vol. 103(4), pages 767-787.
    5. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March.
    6. Narayana Kocherlakota & Thomas Krueger, 1999. "A Signaling Model of Multiple Currencies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 231-244, January.
    7. Canice Prendergast & Lars A. Stole, 1996. "Non-Monetary Exchange Within Firms and Industry," NBER Working Papers 5765, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Paul Hallwood & Ronald MacDonald, 2008. "International Money and Finance," Working papers 2008-02, University of Connecticut, Department of Economics.

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