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The Debt-adjusted Real Exchange Rate for China


  • Frait, Jan

    (Czech National Bank)

  • Komárek, Luboš

    (Czech National Bank)


The paper aims to enrich the debate on the overvaluation/undervaluation of China yuan Renminbi (CNY) against USD and JPY by applying the concept of the Debt-Adjusted Real Exchange Rate (DARER). This approach is offering to monetary policy makers another indicator for more responsive management of this important economic variable. The general motivation for constructing DARER is the fact that long-term current account surplus (deficits) is linked with capital outflows (inflows), which often leads to real undervaluation (overvaluation) of domestic currency. DARER can signal to the authorities that the real exchange rate is becoming unsustainable in the medium term. Based on the DARER approach we also introduce three indicators of exchange rate misalignment.

Suggested Citation

  • Frait, Jan & Komárek, Luboš, 2008. "The Debt-adjusted Real Exchange Rate for China," The Warwick Economics Research Paper Series (TWERPS) 850, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:850

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    References listed on IDEAS

    1. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
    2. Ofair Razin & Susan M. Collins, 1997. "Real Exchange Rate Misalignments and Growth," International Finance 9707001, EconWPA.
    3. Gian Maria Milesi Ferretti & Assaf Razin, 2000. "Current Account Reversals and Currency Crises: Empirical Regularities," NBER Chapters,in: Currency Crises, pages 285-323 National Bureau of Economic Research, Inc.
    4. Ofair Razin & Susan M. Collins, 1997. "Real Exchange Rate Misalignments and Growth," NBER Working Papers 6174, National Bureau of Economic Research, Inc.
    5. MacDonald, Ronald, 2000. "Concepts to Calculate Equilibrium Exchange Rates: An Overview," Discussion Paper Series 1: Economic Studies 2000,03, Deutsche Bundesbank.
    6. Rebecca L Driver & Peter F Westaway, 2005. "Concepts of equilibrium exchange rates," Bank of England working papers 248, Bank of England.
    7. Fabella, Raul V., 1996. "The debt-adjusted real exchange rate," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 475-484, June.
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    Cited by:

    1. 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.
    2. Luboš Komárek & Martin Motl, 2012. "Behaviorální a fundamentální rovnovážný měnový kurz české koruny
      [Behavioural and Fundamental Equilibrium Exchange Rate of the Czech Koruna]
      ," Politická ekonomie, University of Economics, Prague, vol. 2012(2), pages 147-166.

    More about this item


    Exchange rate ; current account ; misalignment ; China ; DARER;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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