## 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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## Bibliographic details
- 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

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### Overview
- 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.

### Key findings
- 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.

### Policy implications and recommendations
- 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.

### Model and analytical insights
- 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 tags and keywords (as provided)
- 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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_Source: https://www.imf.org/en/publications/selected-issues-papers/issues/2025/04/15/foreign-exchange-intervention-through-the-lens-of-the-quantitative-integrated-policy-566272_