Research Papers

The latest financial crisis reflected the need to properly understand, measure and possibly project the systemic events, which have a high probability of interrupting of the normal functioning of the financial markets, resulting in a suffering of the economic growth. The aim of this paper is to present a Financial System Stress Index for Albania, which aims to capture the level of financial stress of the economy in a single and comprehensive index (FSSIA). We assess the interlinkages of the different market segments through evaluating their impact on economic growth, hence providing a clear method in discussing the evolution of the subindices of the banking sector, money market, foreign exchange rate and housing market into the financial stress.

This discussion material analysis the effects of fiscal policy on the economic growth in the case of a small open developing country, Albania, by employing an endogenous growth model on a GMM approach. The results obtained show that government revenue policies has a higher effect on economic growth than those on government expenditure. The impact of revenue and expenditure on growth were analysed by categorising tax revenue into distortionary and non-distortionary, whilst government expenditure were divided into productive and non-productive.

The recent financial crisis showed that the credit risk is an important source of risk of the financial system. In this paper the authors have devised a macro stress test for Albania assessing the impact of the direct and indirect credit risk channels using aggregated banks data. This stress test could be used as a satellite to the existing macroeconomic model in the Bank of Albania (BoA), to examine the macroeconomic implications of the scenarios derived by the latter or alternatively, the estimated parameters can be employed in sensitivity analysis.

Developments of rapid credit growth during 2004-08 in Albania, and then the immediate slowdown that lending suffered after 2008 are important events worth an in-depth analysis, not only from the macroeconomic but also from the financial system’s stability point of view. This paper aims to study the behaviour of lending to the Albanian economy, and to estimate its fluctuations over the last decade.

This paper tries to assess the current account norm in Albania. For this reason, the study is based on the accounting framework developed by Lane and Milesi-Ferretti (2006) as well as the empirical framework that is based on panel data estimations. The “equilibrium” levels suggested by these methods are often dissimilar, thus the size of current account adjustment needs to be carefully interpreted. The paper aims to shed light also on possible implications that recent external deficit deterioration might have for monetary policy in concert with fiscal policy.

This discussion material focuses on evaluating the long-run meanreverting properties of debt to GDP ratio by unit root approach. Findings demonstrate that the debt to GDP is mean-reverting over time, while there seems to be no evidence when this indicator is measured in real terms. Further, the material considers a fiscal policy reaction function to understand whether government pursued appropriate policies to avoid excessive debt accumulation.

This research attempts modelling equilibrium real exchange rate for Albanian currency. For high-growth economies, factors like Balassa-Samuelson effect and terms of trade, referring to internal and external equilibrium in an economy, play a substantial role in guiding equilibrium RER.

In 2006, the Bank of Albania decided to abandon its Monetary Targeting regime in favour of Inflation Targeting one. Against this setting, the Bank of Albania focused its research and analytic efforts on the development of empirically-based models for forecasting inflation and, in addition, one macroeconomic model, MEAM (macro econometric model for Albania). This model aims to analyze different scenarios and shocks in the economy, thus enabling nonnaive forecast of main macroeconomic variables, based on current and expected developments.

This discussion material analyses the change in international reserve holdings and their determinants, and evaluates their optimal level from a cost opportunity perspective. The material is based on the Buffer Stock model. This model assumes that reserve holdings are affected by changes of payments and receipts in the balance of payments. Reserves serve as a buffer stock to accommodate fluctuations of external transactions.

This paper aims to present the developments in the inflation forecasting process for the period 2007-2010 and their integration into the monetary policy decision-making at the Bank of Albania (BoA). The history of forecasting at the BoA is still recent compared to earlier experiences in this field, but relatively “mature” compared to the forecasting work at the other institutions and agencies in the country and in the region. Besides our experience in developing forecasts, the reliable and timely statistical information remains a crucial factor in the projection process.