Analysis of the adjustment of the Danish real exchange rate to changes in public debt

Abstract

The aim of the work is to perform a theoretical analysis of the adaptation of the debt-adjusted real exchange rate (DARER) to changes in the state debt, to empirically analyze the influence of the interrelationships of the variables used in the DARER model on each other according to the vector autoregression econometric model, which confirms the suitability of the DARER model when focusing on exchange rate indicators. As a key policy variable and one of the most controversial issues of open macroeconomics, the real exchange rate is becoming an extremely important subject of analysis in country finance analyses. Certain mismatches are used as a means of predicting future exchange rate changes between countries that make up an exchange rate system, where the price of a country’s currency is determined by the relative supply and demand of other currencies while assessing the need for exchange rate adjustments in countries with a less flexible regime. Since the exchange rate itself does not take into account the country’s domestic indicators, such as the country’s debt obligations - debt service payments or current account balance indicators, the dependence of changes in the real exchange rate on debt service fees can lead to a different deviation of the exchange rate than the real exchange rate itself. The interdependence of the variables seen in the work, the calculations of the penalized real exchange rate and the DARER concept leave no doubt that the country’s real exchange rate adjusted by the payment of public debt service, the DARER model concept is an additional tool for analyzing economic indicators, paying more attention to the country’s domestic indicators. In this work, four hypotheses related to the analyzed factors are proposed, three of which are confirmed.