PRESS RELEASE
First Deputy Governor Elisabeta Gjoni: Speech at the international conference organized by the Department of Economics, Faculty of Economics, University of Tirana, 1 December 2017

Dear professors,

Dear colleagues,

Dear students,

It is an honour for me to address, on behalf of the Bank of Albania, the first international conference organized by the Department of Economics, Faculty of Economics on "Socio-Economic Perspectives in the Age of XXI Century Globalization". At the same time, it is a great pleasure to be among my colleagues in my faculty.

Today, I would like to share with you about the role and the value that the Bank of Albania gives to analysis and research.

The Bank of Albania is committed to the research, investing seriously in human, financial and technological capacities to support research and scientific analysis. The purpose of this investment is to utilize the extensive statistical information in the field of economy, finance, demography, etc. to provide a more comprehensive understanding of conceptual and empirical fundamentals that affect price stability and financial stability in the economy. Conclusions and findings of the research at macro and micro economic level are generally related to the effects of economic and financial developments in Albania on monetary policy, monetary operations, financial stability policies or banking supervision. The objective of the research activity is to support decision-making with a view to fulfilling the Bank of Albania’s mandate. At the same time, the research aims to promote and support public and academic debate on economic developments in the country and beyond, also serving as a learning place for the Bank’s staff in their daily work.

The focus of scientific research, methodologies and sources of statistical information has evolved in tandem with the current issues and the issues of concern to the Bank of Albania. Even though it has been 10 years since the outbreak of the global financial crisis and its effects have evolved, they remain present in the economy. Our research and analysis have reflected this evolution in the best way possible. The predominant topics in research and scientific conferences of the Bank of Albania have been those related to the re-conception and re-orientation of macroeconomic policy; analysis and discussion of financial stability issues and effects from crisis spillover channels; the re-conception of monetary policy in light of financial crises and its interaction with the financial stability policy; the role and impact of financial developments and the financial market structure on financial stability and the effectiveness of central bank policies.

Various studies discussed in these activities and published in scientific publications of the Bank of Albania have found that the factors that may have prevented everyone from foreseeing the upcoming “storm” were the moderate fluctuations in the economy and price stability. Central banks, especially those under an inflation targeting regime believed that the use of an instrument (i.e. the key interest rate) for a single purpose, (inflation control) was sufficient to achieve and maintain their objectives as the monetary authority. But, financial innovations, expanded and complicated over time, led to the rise of the traditional financial leverage, which caused instability throughout the system, though with a diversified risk allocation.

Of course, the Balkans and Albania could not be immune to the "contagious" effects of the crisis. The effects were reflected in the decline of exports, the decline in economic growth, the rapid decline in lending and the reduction by half of remittances, in the form of investment or assistance for their relatives back home.

Faced with these challenges, the Bank of Albania implemented an accommodative monetary policy, steadily cutting the key interest rate starting from 2009. However, against the backdrop of a prolonged global financial crises, price stability is a necessary but not sufficient precondition, prompting the Bank of Albania, like many other central banks, to address the issue of financial stability through macro-prudential policies to strengthen the banking and financial system, as well as to address the issue of non-performing loans.

These developments and the overall economic and financial mechanism that connects them are of a particular interest to research. Over the years, research analyses have sought to answer many of the challenges and dilemmas that our economy is facing. For that reason, in the last decade, we have re-evaluated the research focus and models. Unlike the pre-crisis research topics, which were largely in support of the monetary policy and inflation targeting, using aggregate data and macroeconomic models (such as VAR, VECM, ARDL, etc.), now there is a need to study the economy more thoroughly as well as the heterogeneity among economic agents including households, enterprises and banks. The research at the Bank of Albania is therefore reoriented towards microeconomic analysis using panel and inter-sectoral data in support of the Bank of Albania’s function as a supervisor of the financial stability and regulator of the banking system activity.

Over this period, together with national and international experts of the economy and finance as well as academics, we have been able to analyse the latest trends and developments in the financial sector in the region, focusing on potential implications of the macroeconomic stability and financial stability of each economy. From a general point of view, the Bank of Albania’s studies present, in a rigorous scientific form and methodology, the empirical work of the Bank of Albania for the analysis of the banking system development, efficiency, financial stability, competitiveness, sovereign risk and risks that the Albanian economy may face in the future.

Let me illustrate, with some examples, some of our most recent studies:

• A scientific study on the assessment of the “lower bound monetary policy rate” at the beginning of 2016, when we were faced with very low inflation, a challenging external environment and the risk of unanchored inflation. Under these conditions, when it was still unclear how long this could last, one of the most essential questions of monetary policy demanded an answer: how far could the base rate be lowered? Which are the factors that should be considered to estimate this lower bound? Is there room for non-conventional measures and how do they relate to financial stability? Which measures are the most effective ones? The study tries to estimate the extent to which the base rate of monetary policy could be lowered, given the concrete terms of Albania to ensure price stability, without compromising financial stability. The study clearly concluded that, as a result of exchange rate stability, a key factor in our economy- the lower bound rate was not reached and there was still room to use the traditional instrument. In a euroised economic and financial system, these results and other dedicated research have been considered in Bank of Albania’s de-euroisation policies.

• The monetary policy transmission mechanism has been an integral part of the analytical and empirical studies of the Bank of Albania with the aim of identifying and assessing the impact of monetary and exchange rate pass-through channels to output and post-crises inflation, based on new empirical facts.

• Studies regarding credit gap, financial penetration and inclusion, and structure of financial system, to support sustainable economic growth are in still in process and yet to be completed. They aim to assess with acceptable reliability the optimal levels of growth indicators in the real economy and financial sector.

• Currently, there are studies going on regarding the interaction between macro-prudence and micro-prudence, followed by modelling of relevant instruments to mitigate the effects of the financial cycle on the economy.

• The empirical work of the Bank of Albania has been conducted in the form of several econometric models, which focus on the monetary policy, the real economy and the financial system. These models describe in details the relationship between the banking sector and the economy in general. They provide a quantified analytical picture through which the effects of potential risks at the individual or macroeconomic level that may affect the financial sector can be analysed and evaluated. These models provide a set of instruments to analyse and project the behaviour of the banking system on macroeconomic financial developments and the effectiveness of policies undertaken by the Bank of Albania. The models are an added value to the analysis of developments in the banking system versus alternative means based on equations as they determine and generate estimates for the main economic and financial indicators in an endogenous and simultaneous manner.

Bank of Albania research findings identify the need to deepen empirical research and to discuss them with experts of the respective field.

• The current issues and gaps identified in the empirical framework of analysis and forecasting for the financial and banking markets determine the need for expanding scientific research, with regard to financial stability issues and banking supervision.

• The fields of data and statistics need to be further studies in order to provide reliable and systematic information. Currently, due to technological developments the amount of information generated and accumulated in all areas of life is increasing rapidly. This information contains and shows the public’s behaviour and its perception regarding political, social and economic development. As such, it contains valid signals for policy making. The “wise” use of this information can help evaluate public expectations and perceptions and improve forecasting and decision-making analysis. In this context, the Bank of Albania intends to invest in the research and application of “Big Data” technologies to filter the valuable information from the set of numerical and written information (structured or not) generated by the entire economy and the public. We also encourage other researchers to get involved in this project- a new challenge that would greatly enrich our analysis.

We hope that the research at the Bank of Albania regarding the above-mentioned fields will encourage the academy and researchers to further complete the missing links, making it part of their academic work. In this way, the academy will lead further developments and support policy-making as much as possible. Therefore, I would like to invite all those who are interested to be involved in the discussion of academic and scientific works.

In addition to possessing consolidated theoretical knowledge, the academy has the potential to serve as a guide regarding development of policies, both in terms of research inputs and in terms of participation in decision-making processes. The Bank of Albania notes that institutions have made a significant contribution to the creation and accumulation of human capital in scientific research. Currently, through doctoral studies there is a scientific research network that includes professors, current students and academic institutions. This network has great potential for developing scientific research in the economy and discussing the research generated by the Bank of Albania or other relevant institutions. Their participation in the activities organized by the Bank of Albania that aim to discuss analysis and empirical studies may be even greater. Consequently, I urge potential scholars and users to engage in discussing academic and scientific works in the realms of economy and finance, because empirical models are constantly subject to improvement and completion. Consequently, participation and discussion is an essential process to decision-making. At the same time, I encourage readers to discuss with the Bank of Albania's researchers and employees to develop the debate on the above topics and to encourage the research of these hypotheses from new perspectives.

With the hope that the proceedings of this conference will be characterised by a fruitful exchange of ideas and views, I wish you all the best.