Is the floating exchange rate a shock absorber in Albania? Evidence from SVAR models

The choice of a foreign exchange regime hinges primarily on whether the real rate acts as shock absorber or reverberator for macroeconomic fluctuations. This policy is considered central especially prior to joining currency areas such Eurozone. We investigate Albania’s current floating contributes stability, generates volatility. Using three different structural vector autoregression techniques, and an expanded five-variable model, we show that has played absorbing role, buffering Albanian economy from demand shocks. analysis reveals monetary shocks supply-side have modest contributions in evidence favor “shock absorbing” view rates lends support flexible system. If future Albania considers area, its authority will need pay attention misalignments well availability flexibility alternative adjustment mechanisms.