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Importance of the Debt-Adjusted Real Exchange Rate in the Eurozone and V4

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  • Patrik Abrahámek

    (Patrik Abrahámek, Department of Finance, Faculty of Business and Economics, Mendel University in Brno, Zemědělská 1, 613 00 Brno, Czech Republic)

Abstract

The purpose of this paper is to determine a potential overvaluation and undervaluation of currencies of selected eurozone countries and of the Visegrád Four. The DARER (Debt-Adjusted Real Exchange Rate) model was used for an empirical analysis of the period between 2010-2014 in individual quarters. The advantage of this model is that it explicitly takes into consideration the development of the current account and the debt of the country in connection with the theory of purchasing power parity. The DARER model appears to be a suitable tool for the empirical analysis because, currently, there are many countries in the eurozone with a high debt. In the analysis, data on the current account, debt service payments, GDP, HICP USA and individual researched countries, the exchange rates EUR/USD and CZK/USD, PLN/USD, HUF/USD were used. According to the average overvaluation and undervaluation of currency in all observed states in the Eurozone, in total the overvaluation of the euro against the US dollar was 19.3 %. The overvaluation in individual countries varied from 6.3 % to 33.38 %. These differences in the overvaluation of states' currency against the US dollar were caused mainly by different development of the balance of payments of the country and the country's debt. This can indicate various levels of external imbalances among the states within the monetary union. According to the result of this research, the DARER model was able to identify varying overvaluation and undervaluation of currencies in individual eurozone states and the Visegrád Group, so it can be used by policy makers as one of the indicators of these external imbalances of individual countries in the monetary union.

Suggested Citation

  • 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.
    • Handle: RePEc:mup:actaun:actaun_2017065041325
    DOI: 10.11118/actaun201765041325
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