The Determinants of Real Exchange Rate in Albania

RER is one of the most important economic variables, especially in today's conditions of integration processes, the removal of trade barriers and increasing direct competition between countries. RER behavior affects the economy in microeconomic terms defining the allocation of resources between the tradable sector and the non-tradable sector. RER affects economy also in macroeconomic terms, through its impact on key economic variables, such as economic growth, employment and inflation. But RER itself is affected by economic variables. The aim of this paper is to examine the economic fundamentals that determine the level of the RER in Albania and the extent of influence of each of them. A log linear regression model is used to assess the impact of relative price of non-tradable to tradable goods, openness, foreign direct investment, remittances, real GDP per capita and government expenditures in defining the level of RER. The Johansen cointegration test suggests a relationship among the variables. The finding is that trade openness and real income per capita are insignificant variables, while the others are important in defining the level of RER.