Frait, Jan and Komárek, Luboš (2002) Theoretical and empirical analysis of the debt-adjusted real exchange rate in selected transition economies during 1994-2001. Working Paper. University of Warwick, Department of Economics, Coventry.

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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.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Money -- Czech Republic, Foreign exchange rates, Debts, Public -- Czech Republic, Banks and baking, Central, International finance
Series Name:	Warwick economic research papers
Publisher:	University of Warwick, Department of Economics
Place of Publication:	Coventry
Date:	August 2002
Number:	No.646
Number of Pages:	34
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
Funder:	Grantová agentura České republiky [Grant Agency of the Czech Republic] (GACR)
Grant number:	402/00/1213 (GACR)
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URI:	http://wrap.warwick.ac.uk/id/eprint/1540

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