Macro Determinants of Real Exchange Rates: Albanian Case
This paper presents an effort to empirically analyze the factors affecting the real exchange rate in Albania, using data for the period 1995–2015. Real exchange rate behavior is at the centre of policy debates because exchange rates play a fundamental role in global trading and portfolio investments. This study applies the VAR model. Johansen Cointegration technique is applied to find long run relationship among the variables.
The data are obtained from the Bank of Albania, World Development Indicators (WDI) published by the World Bank and the International Financial Statistics (IFS) published by the International Monetary Fund. In our analysis we make use of macroeconomic variables such as; budget deficit, the volume of money flows, the net foreign assets, gross domestic product (GDP), and the oil prices.
According to the results of research, this paper suggests that the central bank can decrease the real exchange rate fluctuations more than volume of money flow and inflation by decreasing monetary policies and increasing fiscal policies. Study findings indicate significant and long run relationship between real exchange rate and trade.
KeywordsReal exchange rate VAR model Monetary policy
JEL ClassificationC2 C8 E52
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