THE DEBT-ADJUSTED REAL EXCHANGE-RATE

We propose the Debt-Adjusted Real Exchange Rate (DARER) that better re flects the real price of the real dollar than the RER when the economy is financing trade deficits by foreign borrowing. Estimates of DARER for the Philippines show that in episodes of heavy current account def icits, overvaluation of the domestic currency is markedly underestimat ed by simple RER. DARER performs unambiguously better than RER as a pr edictor of devaluation in the Philippines and Thailand during the peri od 1980-92 (JEL F31). Copyright (C) 1996 Elsevier Science Ltd.