The macroeconomic pass-through effects of monetary policy through sign restrictions approach : in the case of Albania

This paper examines the transmission mechanism of monetary policy in Albania during 2002 M01 - 2014 M12. The main question addresses the macroeconomic pass-through effects of a monetary policy shock, with regards to a conventional interest rate and possible different balance sheet policy changes. The analysis is based on a structural vector autoregressive model for Albanian economy that includes means of the Cholesky identification scheme and the sign restrictions approach. The former produces mixed results, that are either statistically insignificant or show a puzzle behavior. The latter is found to reduce bias, albeit with some supportive significant clear cut robustness evidences of the short run macroeconomic pass-through effects of a stimulus monetary policy that materialises within twelve periods. A stimulus monetary policy is found to support economic activity and increase price level. The effect is positive with regards to bank lending and monetary money stock variables. Exchange rate depreciates, accomplished by some higher stress on financial market condition. Both of these variables show a contemporaneously stronger response compared to the other variables. Analyses show that the greatest impact, through means of policy rate, is found to be on price level, bank lending and real money stock. In contrast, the greatest impact, through the liquidity effect, is on output, exchange rate and financial market conditions.