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Theoretical And Empirical Analysis Of The Debt-Adjusted Real Exchange Rate In Selected Transition Economies During 1994-2001

Author

Listed:
  • Frait, Jan

    (The Czech National Bank and Economic Faculty of Ostrava)

  • Komárek, Luboš

    (University of Economics Prague)

Abstract

This paper aims to enrich the debate on the overvaluation/undervaluation of the Czech koruna and the currencies of other selected transition economies by applying the concept of the debt-adjusted real exchange rate (DARER), thereby offering monetary policy makers another indicator for more responsive management of this important economic variable. The motivation for constructing DARER is the fact that many transition economies finance their long-term current account deficits with capital flows, which often leads to real overvaluation of their currencies. DARER can signal to the authorities that the real exchange rate is becoming unsustainable in the medium term and that if this signal is ignored, a currency crisis may ensue. The paper is in seven parts. The first three parts contain the theoretical underpinning of the concept. Part four defines newly proposed indicators of exchange rate overvaluation. Part five contains empirical DARER results for the Czech Republic. Part six and annex 1 to this work contain empirical DARER results for selected transition countries, including a brief description of those countries’ exchange rate histories. The final part examines the possibilities and limitations of the DARER concept in practice. The primary aim of this part, however, is to explain the information content of the real exchange rate as a very good warning signal of potential currency crisis.

Suggested Citation

  • Frait, Jan & Komárek, Luboš, 2002. "Theoretical And Empirical Analysis Of The Debt-Adjusted Real Exchange Rate In Selected Transition Economies During 1994-2001," The Warwick Economics Research Paper Series (TWERPS) 646, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:646
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    References listed on IDEAS

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    Cited by:

    1. Ujjal Protim Dutta & Partha Pratim Sengupta, 2018. "Remittances and Real Effective Exchange Rate," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 19(1), pages 124-136, March.
    2. Frait, Jan & Komarek, Lubos, 2008. "The Debt-adjusted Real Exchange Rate for China," Economic Research Papers 269848, University of Warwick - Department of Economics.
    3. Alper, Ahmet Murat & Civcir, İrfan, 2012. "Can overvaluation prelude to crisis and harm growth in Turkey," Journal of Policy Modeling, Elsevier, vol. 34(1), pages 112-131.
    4. Patrik Abrahámek, 2017. "Importance of the Debt-Adjusted Real Exchange Rate in the Eurozone and V4," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 65(4), pages 1325-1337.

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    More about this item

    Keywords

    Real exchange rate ; under/overvaluation ; transition JEL Classification: E50 ; F31 ; E47;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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