listed in New York.<sup>44</sup> These transactions constituted a legal way of circumventing currency limits and converting pesos to dollars, which were deposited in offshore accounts. Many of these dollars returned to Argentina off the books (and into the blue market) or as payment for imports. The blue chip swap signaled the risk of a roughly 36% overvaluation of the US$/peso exchange rate as of December 14, 2015, ahead of the reunification of the exchange rate.

In addition to the blue and grey rates, a multitude of other exchange rates emerged in Argentina and were described by color (green, light-blue), by city (Miami, Colonia), a rate for individual savers, and another just for soy exporters (see Table 5). Foreign transactions and soy exports were essentially ‘taxed’ by a fixed spread over the official rate. We restrict our definition of parallel exchange rates to refer to the blue and blue chip swap rates.

<u>Table 5: Argentina’s multiple exchange rates and premia w.r.t. official rate</u>

|_Source: www.dolarblue.net_<br>**Exchange rate**|**Description**|**Legal status**|**Dec. 4, 2015**<br>**US$/Peso**|**US$/Peso**<br>**Premia (%)**|
|---|---|---|---|---|
|White|Official exchange rate.|Yes|0.10|0.0|
|Blue|Parallel market rate tracking stock market prices in Argentina and the US.|No|0.07|34.1|
|Blue chip swap / grey|Capital flight dollar using financial arbitrage.|Yes|0.07|35.7|
|MEP / bolsa|'Liqui casero' - arbitrage for sovereign bond, ex: Bonar 2017 and Boden 2015.|Yes|0.07|33.8|
|Light blue / celest|Real estate rate. Average of white and blue.|No|0.08|20.5|
|Savings|Dollars for personal use (max. monthly purchase = $2,000). Official rate + 20%.|Yes|0.09|16.7|
|Foreign credit/debit card|Card transaction rate for tourists in Argentina. Official rate + 35%.|Yes|0.08|25.9|
|Miami|Purchases abroad over $300. Foreign credit/debit card rate + offirical rate/2.|Yes|0.06|45.9|
|Colonia|Uruguay ATM advance withdrawals. Foreign card rate + 3% p.m + operating fees.|Yes|0.08|20.7|
|Airport|Buying rate.|Yes|0.10|0.1|
|Mayoristas bancos|Firms transfering/remitting money abroad.|Yes|0.10|0.0|
|Reference BCRA|Central Bank of Argentina reference (buying) rate.|Yes|0.10|0.0|
|Soy|Agricultural export retention. Official - 35%|Yes|0.16|-53.8|
|Dollar convertibility|Implicit theoretical shadow rate based on the monetary base, reserves excluding foreign<br>liabilities or short-term debt,and adjusted dollar deposits.|No|0.05|55.7|

# **_Law of One Price (LOP)_**

The law of one price has been used to construct several measures of currency over and undervaluation. We consider the overvaluation implied by The Economist’s Big Mac and Commsec’s iPad price indices, under the assumption that the law of one price holds. This hinges on the restrictive (and implausible) assumptions regarding the absence of: barriers to trade (e.g., tariffs), transport costs, adjustment costs (causing price differentials to respond with a lag), and market power (which leads firms to price to market). We calculate the implied exchange rate as the local price of the good in pesos relative to its price in US dollars abroad and measure the percentage misalignment.

The Economist’s Big Mac index computes the exchange rate that would equalize prices of a Big Mac burger in MacDonald’s across countries, while an adjusted index attempts to correct for country differences in labor costs and GDP per capita. The adjusted index suggests the overvaluation of the peso has fallen from 50% in July 2011 to -5% in July 2015 (see Figure 10).<sup>45</sup> Yet we caution against this indicator of exchange rate overvaluation for Argentina as a result of market-diverging burger prices. Big Mac prices for Argentina have been subject to large controversy since 2011,<sup>46</sup> when the Big

> 44 However, costs of doing business by using this exchange rate are high as securities priced in US dollars must be purchased and exchanged to obtain scarce foreign currency.

> 45 In January 2016, the Big Mac index implied the peso is undervalued by an even larger 33% (106% according to the unadjusted index).

> 46 The Big Mac index for Argentina provides suggestive evidence of official inflation statistics being misreported. According to the Economist in January 2011, statistics support "claims that Argentina’s

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