”Fear of Floating” in Albania and Economic Growth

Abstract

This study endeavours to understand the volatility of the exchange rate in Albania and to see if there are sign of “fear of floating” present. De jure Albania currently applies a flexible exchange rate regime. Traditionally the main argument in favour of this policy is that monetary policy is not constrained by the predetermined level of the exchange rate. Thus, monetary policy sets interest rates in order to achieve domestic equilibrium (ie. price stability) while the nominal exchange rate adjusts to balance the external accounts. Theoretical evidence concerning the impact of exchange rate stability on growth is mixed. The theoretical arguments in favour of flexible exchange rates are mainly of macroeconomic nature, as flexible exchange rates allow for an easier adjustment in response to asymmetric country specific real shocks. From a microeconomic perspective low exchange rate volatility can be associated with lower transaction costs for international trade and capital flows thereby contributing to higher growth.

Keywords

• exchange rate
• fear of floating
• trade
• economic growth