Relationship Between Exchange Rate and Trade Balance: "the Case of Albania"

Abstract

This paper analyzes the relationship that exists between the trade balance and the exchange rate. For a clearer picture of the results, other macroeconomic factors that are thought to have an impact on the trade balance, such as economic growth, trade openness, foreign direct investment, and remittances are analyzed. The main objective of this paper is to empirically identify the impact that exchange rate volatility has on the trade balance, specifically Albania. The study uses data obtained from the World Bank and INSTAT for the period 2000-2018. The method used is the empirical method in presenting the facts and the performance of macroeconomic factors and the econometric method in analyzing the relationship between the exchange rate and the trade opening. The VAR model was used to estimate the regression results and the evaluation procedure for the parameters is time series, using data on trade as a percentage of GDP, Euro / ALL exchange rate, foreign direct investment, economic growth, and remittances. The results of this study show that in the case of the Republic of Albania according to the VAR model there is no stable relationship between the exchange rate and trade.