The Equilibrium Real Exchange Rate of THE Lek vis-à-vis the Euro: Is It Much Misaligned?
The World Bank
Bank of Albania
This study follows the stock-flow approach to examine the equilibrium real exchange rate in Albania - a methodology particularly suitable for emerging economies. Using the bound testing approach to cointegration, we identify the long-term factors that have influenced the real ALL/EUR exchange rate during the period from 1999 to 2008 and check whether there is a significant misalignment. Foremost, we examine the impact of the productivity differential and net foreign assets on the real exchange rate of the lek. A number of other control variables have been added to the reduced-form equation, such as government expenditure, the terms of trade, emigrant’s remittances and the uncovered interest parity, without, however, having improved significantly the explanatory power of the model. The results confirm the benefits of the free-floating regime adopted in Albania which has avoided the presence of a long-lived period of significant misalignments.
JEL Classification: C1, C3, F3.
Keywords: exchange rate, stock-flow approach, emerging economies, Albania
Acknowledgments: Special thanks are due to our discussant Dimitrios Maroulis and the workshop participants for their constructive comments and a fruitful exchange discussion. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Bank of Greece, the Bank of Albania and the World Bank. We alone are responsible for the remaining errors and omissions.
Ilir Vika Erjon Luçi
Head of Macroeconomic Modelling Sector Europe and Central Asia
Research Department, Bank of Albania The World Bank
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Tiranë, Albania Tiranë, Albania
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