Oct 16, 2012 (LBO) – Debating whether Sri Lanka’s rupee is ‘overvalued’ is a wasteful exercise as models used to determine some intrinsic value of an exchange rate are not worth the paper they are written on, an International Monetary Fund official said. “Economists – we – have these models,” IMF’s resident representative Koshy Mathai told, a pre-budget forum in Colombo organized by the Ceylon Chamber of Commerce.
“I don’t think they are worth the paper – or the virtual paper – they are written on.
“Most of them do not take into account the role played by capital flows and the durability of those capital flows.”
He was responding to an questions from the audience that a ‘competitive’ exchange rate close to 140 to the US dollar.
Mathai said when he was working in the US, standard models used showed that the US dollar was “substantially overvalued.”
US authorities had responded by saying that because of “innovative financial markets” that created instruments like derivatives and collateralized credits and the demand for them meant that the dollar was at the “correct level.”
“Now we saw in the financial crisis, what happened to the demand of that type of instruments,” he explained, smiling.
“But maybe the last laug