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Word Count: 483
The paper is a clear breath of dirty air in the sterile world of perfect foresight The authors offer a well worked out model of how agents persistently bid the exchange rate away from the expected long-run equilibrium rate It seems intuitively comfortable to see the mathematical justification for the unexplained excess returns to be a function of the distance from the bench-mark PPP The uncertainty of a switch occurring in a regime the Peso Problem is an interest-ing form within which to embed the imperfect information It is a format that seems ready to ex-pand into many other areas of economic modeling in which expectations are at the core of the models dynamics Of course the choice of the benchmark is key to the mechanics of the process In this case PPP is an obvious choice but since the idea of PPP drives this model so strongly it is interesting to look at its place and its characteristics In the paper the authors note that if PPP holds relative excess demand for domestic and foreign goods is zero The obvious suggestion based on the model is that the flow of goods and services is the foundation for the equilibrating dynamic Behind the flow of goods and services is the gap between the gap between domestic and foreign short-term rates and the steady state long-run interest rate gap that sets goods flows to zero The assumption is that the prices of the domestic and foreign goods in their respective for-eign currencies are incorrect based on the fundamentals of the respective countries and that agents know this and know that the exchange rate path is unstable but cannot be sure of the de-gree of incorrectness or the persistence of the divergence Embedded into this model are as-sumptions about PPP that provide comfort about this benchmarks ability to give the correct relative prices It is possible that these assumptions to some degree mask the complexity of the
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