Economic Expectations

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August 31, 2024 4 min read Definitions

Peso Problem: An Economic Dilemma in High-Inflation Economies

Economics Finance Inflation Interest Rates Currency Depreciation Economic Expectations Risk Premium

The Peso Problem is the tendency in countries with a history of high inflation for interest rates to remain higher than in other nations. This results from past inflation and currency depreciation experiences, leading to expectations of future instability. It necessitates an interest premium to compensate for perceived risk. While named after Mexico's currency issues, many countries have experienced similar phenomena.