MONETARY POLICY OF ALBANIA–DOES A MONETARY TIGHTENING RISE OR LOWER INTEREST RATES?

Abstract

Policymakers view interest rates as the main instrument of the monetary policy to achieve the objectives of the Central Bank. The purpose of this paper is to test the relationship between monetary policy and nominal interest rate, in case of monetary tightening for Albania in long and short run. To understand this link, the study was focused on liquidity preference and Fisher effect. Behind this hypothesis, the main ideas include money demand, money supply, interest rates, inflation and the role that Bank of Albania plays in interaction of this components with each other. Analysis of the Fisher effect suggests that, in the long run when prices are flexible, a reduction in money growth would lower inflation and this would lead to lower nominal interest rates. But in the short run when prices are sticky, this monetary policy would lead to falling money growth and higher interest rates. Data was taken from the Bank of Albania during the time interval of the year 1995-2011.