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The debt-adjusted real exchange rate for China

By Jan Frait and Luboš Komárek

Abstract

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

Topics: HG
Publisher: University of Warwick, Department of Economics
Year: 2008
OAI identifier: oai:wrap.warwick.ac.uk:1366

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Citations

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