Wednesday, May 16, 2007

Humility in making statements about equilibrium exchange rates

In discussions about the rupee, many people are offering views about overvaluation (or lack thereof). In a recent piece on the subject [link], I said :

The present state of economic science does not permit such confident statements. REER calculations are extremely imprecise and have little content in explaining key relationships - as the above example shows.

Menzie Chinn has a blog posting on this subject. I found it particularly amusing that the two numerical values about the Indian rupee on this page were +12.1 and -14.7. In other words, we just don't know.

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