Short Term Impact of Euroization on Key Economic Indicators in Albania

Abstract

The use of foreign currency in post-communist countries of Eastern Europe, including Albania, is a widespread phenomenon. Since all the countries passed from a totalitarian to a free open market system, foreign currency is perceived as a protector against the macroeconomic instability that characterized these countries. Most of these countries in transition expressed their preferences for the use of European currency, leading to a partial Euroization of their economies. In academic literature and politics, the predominant opinion is that Euroization provides advantages in the short run especially for developing countries with the aspiration of accession to the European Union. However Euroization, besides its advantages, has a number of disadvantages in terms of economic costs and impact on the monetary system of the country. In order to make policy decisions regarding Euroization, it is important to understand the impact of Euroization on key economic indicators such as inflation, imports, exports interest rates, and exchange rates for Euro and USD. Therefore, this paper attempts to provide an exploratory examination of the impact of Euroization in terms of loans and deposits in foreign currency on these key Albanian economic indicators. Data are obtained from the Albania Institute of Statistics, the International Monetary Fund and the Banka of Albania. A Vector Autoregressive Model is used to assess the impact of Euroization on key economic indicators and see whether Euroization is profitable for the Albanian economy. The empirical results show negative effects of Euroization on the Consumer Price Index and positive and negative exchange rates for Euro and USD.