Dynamic Interactions between Major Macroeconomic Aggregates in Albania. A Vector Autoregression Approach
Dynamic Interactions between Major Macroeconomic Aggregates in Albania. A Vector Autoregression Approach

Summary/Abstract: The aim of this research is to investigate dynamic interactions between key macroeconomic variables in Albania and assess the state of equilibrium of the Albanian macroeconomic system. Growth, unemployment and inflation rates, government deficit, money supply, current account deficit, interests and exchange rates are some of the selected macroeconomic aggregates. Yearly time series of these aggregates for the period 1994-2016 have been used. The key concern is to investigate whether these variables are mutually co-integrating, whether they are in equilibrium or whether past history of some variables affect their or other variables future levels; and whether shocks to the system have been active or not. VAR analysis and co-integration techniques are used as research tools. It is found that the macroeconomic system is characterized by a relative stability and equilibrium is far from being full, as only part of major variables, such as inflation and growth, bank deposit and exchange rate have been in a relative medium to long-term equilibrium. Current and fiscal deficits and growth are not in long￾term equilibrium. Based on the co-integration results, the overall performance of the economy during transition could be much better and so the performance of the public economic governance. The system has well absorbed external or from-within shocks and relatively good forecasts could be made for macroeconomic aggregates based on their current and lagged levels.

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