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The Equilibrium Real Exchange Rate of THE Lek vis-à-vis the Euro: Is It Much Misaligned?

 

Erjon Luçi

The World Bank

 

Ilir Vika

Bank of Albania

 

Abstract

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.

 

 

Correspondence:

Ilir Vika                                                                         Erjon Luçi

Head of Macroeconomic Modelling Sector                         Europe and Central Asia

Research Department, Bank of Albania                            The World Bank

Sheshi Skënderbej, No. 1                                                Dëshmorët e 4 Shkurtit, 34

Tiranë, Albania                                                              Tiranë, Albania

Tel: +355 4 2222 152 ext. 4120                          

Fax: +355 4 2223 558                                                    Fax: +355 4 2405 90

Email: ivika@bankofalbania.org                                       Email: eluci@worldbank.org



 


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