Selected Issues Papers

Foreign Exchange Intervention Through the Lens of the Quantitative Integrated Policy Framework: The Case of Albania

By David Bartolini, Jakree Koosakul, Rebecca Huang, Jesper L Linde, Roland Meeks

April 16, 2025

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Format: Chicago

David Bartolini, Jakree Koosakul, Rebecca Huang, Jesper L Linde, and Roland Meeks. "Foreign Exchange Intervention Through the Lens of the Quantitative Integrated Policy Framework: The Case of Albania", Selected Issues Papers 2025, 038 (2025), accessed May 17, 2025, https://doi.org/10.5089/9798229006682.018

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Summary

In recent years, Albania has experienced a sustained appreciation of the domestic currency. This raises the questions of what factors are driving this appreciation and how to calibrate appropriate policy responses. Drawing on insights provided by the IMF’s integrated policy framework (IPF), this paper examines the case for foreign exchange intervention (FXI) in Albania by estimating an IPF model to quantitatively illustrate relevant policy tradeoffs. While the estimation results confirm the shallow nature of the local FX markets, the appreciation of the lek is found to have been primarily driven by fundamental factors, making conventional interest rate policy an appropriate policy tool. Nevertheless, in certain circumstances where the fundamental lek appreciation is likely to be compounded by non-fundamental shocks, including shifts in foreign investor risk appetite, FXI can serve as an effective complementary tool in alleviating output-inflation tradeoffs.

Subject: Currency markets, Exchange rates, Financial markets, Foreign exchange, Foreign exchange intervention, Integrated Policy Framework, Real exchange rates

Keywords: Albania, Capital flows, Case of Albania, Currency markets, Exchange rate volatility, Exchange rates, Foreign exchange intervention, Foreign exchange markets, Integrated policy framework, IPF model, Lek appreciation, Market liquidity, Monetary policy, Output-inflation tradeoff, Real exchange rates, Tourism

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