Factors that Affect Real Exchange Rate in the Long-Run and Short-Run in Albania

Real exchange rate is an important economic variable. 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 variables that affect the level of the RER in Albania in long-run and short-run and the extent of influence of each of them. The Johansen cointegration test and Vector Error Correction Model are used to assess the impact of economic variables on real exchange rate. The results of the paper suggest that only relative productivity, trade openness and remittances affect real exchange rate in long-run, while in the short-run real exchange rate in Albania is affected by debt service, government spending, trade openness and remittances.