Monetary policy, exchange rate in Albanian economy

Abstract

There seems to be a general perception that the exchange rate pass-through is the most important channel in the transmission process of monetary policy in Albania. This perception is questioned here in light of the altering relationships in this developing economy. A discussion on the transmission channels in the Albanian economy is followed by a study of the macro-economic relationships and pragmatic econometrics quantifying the monetary effectiveness. The results indicate that the dollar has become less important in the monetary transmission process at the benefit of the euro. There are moreover strong signs that the exchange rate channel as such is loosing its influence at the benefit of the other transmission channels, like the credit channel and most likely the wage channel.

However, economists have tested the PPP theory, pursuing criticisms on the accuracy of this paradigm vis-a-vis the long-run behaviour of the real exchange rate. Studies from Froot and Rogoff (1991) and MacDonald (1995) look at it from this perspective. Under continuous scrutiny, both theoretically and empirically, the PPP theory is generally understood to be able to, at best, determine the real exchange equilibrium only in the very long horizon, which typically overcomes relevant timeframes for economic policy and cannot provide an understanding of factors behind short and mid-term deviations from equilibrium.

Keywords: Monetary policy, exchange rate, Albanian economy

Proceeding of 2020-ECFBR.  The article is recommended by the committee of 2020 European Conference of Finance and Business Research (2020-ECFBR).