Motives and Effectiveness of Forex interventions in Albania

In countries with floating exchange rates, central banks generally intervene to contain market volatility or put a stop to exchange rate overshooting, but not to influence the exchange rate trend. They also intervene to maintain international reserves against vulnerabilities in the external sector, or for mercantilist motivations. Using Probit and nonlinear testing models, this study tries to evaluate the Bank of Albania’s reaction function to intervene during the 2000-14 period. Regarding the response to exchange rate deviations, the analysis has been extended to distinguish divergences from longer versus shorter time trends. The final aim of the study is to assess whether the central bank interventions have been effective in stabilizing the exchange rate by returning it towards an underlying direction and reducing undesired market volatility.