Modelling Probabilities of Devaluations

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 ( à 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

Depreciation (economics) · Econometrics · Economics · Exchange rate · Microeconomics · Monetary economics · Set (abstract data type) · Statistics · Computer Science · Global Financial Crisis and Policies · Market Dynamics and Volatility · Mathematics · Monetary Policy and Economic Impact

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