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

Selected Issues Papers, April 16, 2025

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

Authors: David Bartolini, Jakree Koosakul, Rebecca Huang, Jesper L Linde, Roland Meeks
Published: April 16, 2025
Series: Selected Issues Papers
DOI: https://doi.org/10.5089/9798229006682.018

Authors: David Bartolini, Jakree Koosakul, Rebecca Huang, Jesper L Linde, Roland Meeks
Publication date: April 16, 2025
Core question: What factors are driving the sustained appreciation of the lek and how to calibrate appropriate policy responses?
Approach: Estimates an IPF (Integrated Policy Framework) model to quantitatively illustrate policy tradeoffs for Albania.

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.
Because fundamentals are the main driver, conventional interest rate policy is identified as 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 (foreign exchange intervention) can serve as an effective complementary tool in alleviating output-inflation tradeoffs.

Prioritize conventional interest rate policy when lek appreciation is driven by fundamentals.
Deploy FXI as a complementary tool when non-fundamental shocks amplify fundamental appreciation, particularly to manage output-inflation tradeoffs.
Consider the shallow nature of local FX markets when designing FXI operations, given market liquidity constraints.

Uses the IMF’s Integrated Policy Framework (IPF) as the analytical lens.
The IPF model is estimated for Albania to provide quantitative illustrations of relevant policy tradeoffs between exchange rate dynamics, monetary policy, and FX intervention.

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