The Argentine peso was fixed through a currency board at Ps1.00/$ throughout the 1990s. In January 2002, the Argentine peso was floated. On January 29, 2003, it was trading at Ps3.20/$. During that one-year period, Argentina’s inflation rate was 20% on an annualized basis. Inflation in the United States during that same period was 2.2% annualized.a. What should have been the exchange rate in Janu-ary 2003 if PPP held? Solution.

1. The Argentine peso was fixed through a currency board at Ps1.00/$ throughout the 1990s. In
January 2002, the Argentine peso was floated. On January 29, 2003, it was trading at Ps3.20/$.
During that one-year period, Argentina’s inflation rate was 20% on an annualized basis. Inflation
in the United States during that same period was 2.2% annualized.a. What should have been the
exchange rate in Janu-ary 2003 if PPP held?
Solution