Research Papers

The Monetary Conditions Index (MCI) was first introduced by the Central Bank of Canada [Freedman (1995)] and then many banks and international institutes used this index as a mechanism to interpret the orientation of monetary policy and the effect it has on the economy. MCI is calculated as the linear combination of the variables which represent the main channels of the transmission of monetary policy in an open economy: the real interest rate and thereal effective exchange rate where the coefficients represent their relative effects on aggregate demand. The aim of this index is to give information about monetary conditions.

The objective of this paper is to estimate inflation persistence in Albania for the period 1993 to 2008. We apply the univariate approach with constant and time varying mean of inflation for headline and core inflation, and also test whether there are structural changes of persistence. The empirical results suggest that persistence of headline inflation was somehow higher during the inflationary periods while it started to decline after 1997, when inflationary expectations seem to have been stabilized.

The banking industry is the most important segment of the Albanian financial system and, for that reason, it requires more attention when it comes to financial analysis. This paper handles theoretically and analytically some indicators of risk and performance, and for the first time, the methodology of measuring a risk index for the Albanian banking system is presented.

The study aims at estimating the efficiency and the competitive profile of the Albanian economy, based on the labour productivity indicator (LP ) and unit labour costs (UL C). These indicators are calculated in accordance with best statistical practices outlined in the respective OE CD manuals (2001 and 2008).

The quarterly Gross Domestic Product in Albania is published with a lag of 12 weeks (three months) from the reference quarter. In between, it is important for policy makers to have an evaluation of the aggregate demand and domestic output, to be able to take wellinformed decisions and implement economic policy effectively. For this purpose, this study tests the predicting power of different economic indicators that are available before the quarterly GDP publication. The immediate-term forecasting, a.k.a. nowcasting, is obtained with ADL (p, q) equations, and estimated with OLS. Main results reveal that ‘auto sales and repairs’- a hard indicator -, has the highest predicting power among all tested variables, followed by qualitative (survey) indicators like ‘the industrial sector’s evaluation of current demand’, ‘the industrial sector’s evaluation of current production’, ‘the industrial sector’s expectations on next quarter’s production’, ‘the construction sector’s evaluation of current production’, and ‘the services sector’s evaluation of current demand’. These qualitative indicators are disaggregated indices of the Bank of Albania’s Consumer and Business Surveys. The final nowcasting model includes ‘auto sales and repairs’ and ‘the construction sector’s evaluation of current production’. Selected candidate models outperform naïve and ARIMA models. Keywords: nowcasting, qualitative indicators, Gross Domestic Product, Albania JEL classification: C22, C53, E17

Research on banking system efficiency has always been a debatable and interesting issue. This paper analyses net interest margin as a measure of efficiency for the banks which operate in Albanian banking system and the main focus is the identification of the factors that affect this indicator. According to the estimations carried out for the Albanian banking system, the results show that the net interest margin is positively affected by the interest rate volatility (mainly of euribor, domestic currency’s and slightly of the libor rate), by the level of operating expenses which have had an increasing tendency and by the amount of banks’ reserves in the Central B ank. Other factors that affect the net interest margin are the level of bank capitalization, which should be interpreted with caution; net commission incomes which are negatively related to the dependent variable implying that these two indicators are substitutes of each-other; the effectiveness of management work; credit risk and the concentration level in terms of loans.

The quarterly GDP forecasting models developed in this material aim to estimate the Albanian GDP trends in the short term. . Delays until the publication of the official quarterly GDP data make indispensable the preliminary estimation of this indicator. The modelling strategy of the quarterly GDP consists in building a set of different models for its estimation. They consist on ARIMA models with seasonal components and indicator models, similar to bridge models. This paper presents a first attempt to model the GDP using a multiequations system which accounts for the sectoral interactions. This model can not be used for forecasting purposes because of short time series. The estimates were made for total and for disaggregated sectoral GDP for the period: Q1:2003 – Q1:2009. The models exploit information from economic variables, financial variables and confidence surveys indicators, held by the Bank of Albania. The bridge models estimates show that the past developments of economic and financial variables explain the GDP changes while the survey variables lead them. The above mentioned behaviour of the explanatory variables supports the forecasting process of the quarterly GDP. Thus the policy makers in the Bank of Albania are provided with a timely estimation (nowcast) of the economic activity tendency for the reference quarter and for the coming two quarters. In general, estimations from the developed models are promising. It is suggested that the “best” forecast will be considered the average of the forecasts from all the proposed models. The off-sample forecast performance, “will decide” the model with the best qualities in order to predict the quarterly GDP.

Monetary policy at the BoA has evolved to approach itself in line with contemporary frameworks that meet most elements promoting efficiency and effectiveness. In this paper, we make an attempt to outline the introduction of new aspects as well as improvements to the current set up. In the past two years, The Bank of Albania has arranged two Forums, in December 2 005 and 2 006, in order to assess the conditions for a formal revision of its institutional and operational procedures of monetary policy. In addition, these Forums have contributed to escalate and institutionalize the BoA’s efforts to promote financial development and infrastructure as well as improve its operational and institutional framework for a more effective monetary policy. In this year’s meeting, we come up with an overall outline of the tasks completed, mostly proposed and elaborated in the last two forums, and a general assessment of the most required conditions towards a fully-fledged IT regime for Albania.

This paper follows up on the previous paper titled “A macro econometric model approach for Albania”. The objective is to present the progress of the macro-model during 2007. Actually, the model is enriched with the supply side and fiscal sector and includes the main channels of the transmission mechanism of the monetary policy. We have applied a new method of disaggregating annual to quarterly data and also some new definition of key variables, such as disposable income. The results indicate that the model is stable, it converges in the long run to its desirable path and it may be suitable for different policy scenarios. On the other hand, the forecast performance of the model was so far not analysed.

This paper attempts to apply some approaches in order to quantify the responses collected via the Consumer Confidence Survey conducted by the Bank of Albania. Moreover, it attempts to better understand the nature of consumer inflation expectations in Albania, which result to be adaptive. Accordingly, if the inflation rate increases, consumers expect an even greater increase of inflation in the subsequent period.