# **4.2. Direct estimation-based measures**

Finally, we contrast results obtained using the model-based BEER approach against three commonly used direct estimation-based measures of exchange rate misalignment: parallel exchange rate premia, the law of one price condition, and purchasing power parity.

We stress that it is important to consider their assumptions and caveats in evaluating their relevance. For the case of Argentina, where price statistics were allegedly manipulated (under reported), the law of one price and purchasing power parity may considerably underestimate exchange rate overvaluation. Moreover, in the presence of trade restrictions, the law of one price may have the opposite effect of considerably overestimating the degree of overvaluation.

An additional caveat is that direct estimations derived from the LOP and PPP conditions assume that the real exchange rate should be constant and equal to unity in equilibrium, and deviations from unity should eventually die out, exhibiting a stationary or mean-reverting property in the long-run. Empirically, however, the real exchange rate has been found to exhibit persistent deviations and a unit root process, providing weak empirical support for the PPP hypothesis. This speaks in favor of using a modelbased approach such as the BEER, in which we estimate a time-varying equilibrium real exchange rate that allows deviations from PPP to be accounted for by real factors, reconciling the high volatility of the real exchange rate with very slow adjustment of shocks to PPP.

# **_Parallel exchange market premia_**

Parallel exchange rate premia implied by the blue dollar rate and blue chip swap rate (percentage deviations from the official exchange rate) provided two measures of the implied overvaluation of the peso, using data obtained from dolarblue.net and ambito.com.

The published blue dollar rate, or ‘ _paralelo’_ , has been for a long time the bestknown alternative to the official exchange rate and was based on tracking average stock prices of eight major companies quoted on both the Argentine and US exchanges. The blue dollar to official exchange rate spread fluctuated with capital controls, market forces in response to the economy (e.g., demand), and other market information (e.g., expectations), but also affected economic activity. Argentine citizens turned to the blue market for dollars required for personal needs – it was more expensive but easier to obtain given restricted currency availability through official channels. Fear of inflation and of further depreciation of the peso kept demand for dollars high. The blue rate signaled an overvaluation of the US$/Peso exchange rate averaging at 35% over 20132015.

The blue chip swap rate, or _‘contado con liqui’_ , also known as the capital flight dollar ( _‘dolar fuga’_ ) or grey rate, is less well known than the blue, but it was critical to the financial market. This was the implied rate derived when businesses were buying dollar-denominated bonds or shares in pesos and then selling them on international stock exchanges for dollars. Typically the securities involved were Argentine government bonds denominated in dollars or American Depositary Receipts (ADRs) 24