Tuesday, July 15, 2008

The Peso Problem

Alex Tabarrok points us to an overview of the classic Peso Problem

Milton Friedman stated that the interest differential between the two countries may have been due to the market expecting the peso to be devalued against the US dollar. And sure enough, in 1976, the market expectation actually came true as the peso was allowed to ``float'' against the dollar.

Tabarrok also considers this to be a feature of the spread between GSE bond rates and that of other mortgage-backed securities.

More here.

No comments: