However, I would like to briefly address an aspect of macroeconomic and institutional framework, which has been an important determinant of the extent and magnitude of the national authorities’ response to the crises: the exchange rate regime. A quick glance at the current developments in the region and broader allows us to draw the conclusion that the countries adopting a fixed exchange rate regime have been affected by the global crisis proportionally higher. Moreover, they have been more constrained in terms of responding to the crisis. By contrast, countries adopting a free floating exchange rate regime have been affected by the crisis more mildly and smoothly, and they have preserved higher independence in their economic policies for the mitigation of crisis effects. Obviously, this is not occasional: the free floating exchange rate regime is an important political, economic and institutional investment of emerging countries. Their sacrifices in terms of building reliable monetary and fiscal policies, enhancing public confidence in the respective currencies and national financial institutions are rewarded with the flexibility this regime provides to macroeconomic policies in coping with the crises. Exchange rate volatility mechanism is precisely a mechanism that allows the economy to absorb various shocks. The free floating exchange rate regime, devotedly adopted by the Bank of Albania, allows the Albanian economy to withstand these shocks at minimum cost. Let us leave this mechanism operate smoothly, without excessive reactions from the market or its agents. Any smooth moves towards the exchange rate equilibrium will be in the Albanian economy’s own interest.
In doing so, I will focus on two prime channels underlying the second stage of transmission: the exchange rate channel and the real interest rate channel. My remarks will therefore be neither exhaustive nor complete, given that monetary policy can affect the economy through many other channels as well, such as its impact on the valuation of equities and, hence, on firms’ cost of capital and investment decisions, Tobin’s q in short.3 Another channel of relevance is the bank lending channel as formalised by Bernanke and Gertler (1995). But by focusing on the exchange rate and interest rate channels, we can get a good understanding of how effective recent policy measures have been. In particular, I will show that monetary policy-induced exchange rate movements may have considerable impact on consumer prices, but that this relationship depends on the state of the economy and the shocks driving it, much in line with the recent literature in this field. And I will show that the New Keynesian Investment and Savings (IS) curve is alive and well in the euro area – that is, aggregate demand responds to changes in real ex ante interest rates, and can also be shown to have done so in recent times, provided it is measured properly. A state-dependent exchange rate pass-through Let me start with the exchange rate channel – a channel that has been heavily debated in recent months in the light of the large movements that we have observed in the foreign exchange market.