The evidence suggests that foreign exchange markets exhibit excess volatility and that exchange rates diverge from fundamentals for protracted periods. In some sense, the existence of carry trade can be construed as evidence of this, as it involves betting that interest rate differentials are not fully compensated by exchange rate movements; i.e., that uncovered interest rate parity does not hold, except at long horizons, and then often through sharp and disorderly corrections. This, in turn, gives rise to two concerns: first, regarding detrimental effects on the traded goods sector , and second, on financial stability where volatile capital flows, currency mismatches, and rollover risk of foreign currency debt are among the key players. Adverse effects on financial stability can be particularly severe when a blocked interest rate channel and an erratic exchange rate channel interact badly with other economic and financial risks that can face small, open, and financially integrated economies – such as the global financial cycle, domestic financial vulnerabilities, and policy conflicts. We saw trends before the GFC that were consistent with this story. Data on longterm interest rates and spreads in small advanced economies and in many emerging markets economies showed strong and growing correlations with longterm rates and spreads among core rate setters (mainly the US and the eurozone), although still some way from the theoretical limiting case. The GFC reversed this process somewhat, as risk premia skyrocketed, cross-border banking partly retreated to home base, and restrictions on capital movements were in some cases reintroduced.
Gent Sejko: Address to the Parliamentary Committee on Economy and Finance Address by Mr Gent Sejko, Governor of the Bank of Albania, to the Parliamentary Committee on Economy and Finance, Tirana, 23 February 2022. * * * Honourable Chair, Honourable Members of the Committee, Thank you for this public hearing organised in the framework of my nominee for the renovation of the term as the Governor of the Bank of Albania. At the beginning of my address, please allow me to highlight that I am very honoured that the Parliament of Albania re-affirmed the confidence to continue to contribute in the field of Albanian economic and financial area management, as a member of the Bank Albania’s Supervisory Council. In the same spirit, I would like to point out that my nomination for the position as the Governor is motivated by an internal incentive: finalising the thoroughly transformation of the Bank of Albania and turning it in a modern central bank. In my vision, the Bank of Albania should converge towards the conjures of a modern central bank, suitable to be part of the European System of Central Banks; able to deal with the challenges lying ahead in the path of the sustainable economic development, for the comprehensive modernisation of the financial system, for the European integration, and in its function as a reliable partner of Albanian public, civil society and academic world.