This paper shows why regressing the realised rates of depreciation within the exchange rate band on a given information set and conditional on (ex-post) actual no-realignment (à la drift adjustment) still encounters a Peso Problem. Such a procedure generally gives inconsistent estimates. The...

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 (a la drift adjustment), a 'peso problem' is still encountered. The reason is that the frequency of realignments in the...