ESTIMATION OF WEIGHTS FOR THE MONETARY CONDITIONS INDEX IN ALBANIA
Bank of Albania
Monetary conditions represent the combined effect of the interest rates and the exchange rate on the economy. This study aims at assessing the relative weights of the real interest rates and the real exchange rate in the case of Albania. The methodology is based on OLS estimation and considers quarterly data for the period 1998Q1–2008Q4. The new ratio derived from these weights is equal to 3.8, which implies that the effect of an appreciation of the real exchange rate by 3.8 percentage points may be neutralized by one percentage point increase in the real interest rate.
Keywords: monetary conditions index, exchange rates, interest rates, least squares.
JEL Classifications: C22, E52, E59.
Acknowledgments: Special thanks are due to the participants of the 3rd SEE Economic Research Workshop, Athens, 19-21 November 2009, and especially to my discussant Michael Loufir who put time and effort to read and discuss the paper.
Sheshi “Skënderbej”, No.1, Tirana,Albania.
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