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| What is a peso problem? In the case of fixed exchange rates, explain how peso problems can account for persistent interest rate differentials. Study the U.S.–Britain short-term (end-of-month) nominal interest rate differentials shown below for the year 1896 (NBER series 13034). Both countries were on the gold standard at a fixed of $4.86 throughout this year. Did the United States have a peso problem? When did it get really big? When did it go away? (Extra Credit: Do some research on the Web and discover the political reasons for the timing of this peso problem.) Jan 1896…………………………………3.84% Feb 1896………………………………..2.94% Mar 1896………………………………..2.76% Apr 1896…………………………………2.40% May 1896……………………………….1.63% Jun 1896…………………………………1.20% Jul 1896…………………………………1.43% Aug 1896……………………………….3.77% Sep 1896………………………………..3.70% Oct 1896………………………………..8.51% Nov 1896……………………………….2.60% Dec 1896……………………………..– 1.39% |
