Publication overview

The determinants of official and free-market exchange rates in Albania during transition

Abstract

This paper uses high-frequency data to examine the relation between official and free-market exchange rates in Albania. We use daily data to test econometrically, first, whether the official and free-markets are efficient, in the sense that one cannot use exchange rate movements denominated in one currency to predict movements in another currency; and second, whether movements in the free-market rate “cause” movements in the official rate. Our results provide support for the first proposition and partial support for the second. We also report the results of a unique survey of free market dealers in Tirana, designed to determine the main factors that influence exchange rate movements. The evidence is that country-specific factors, in particular the large flows of illegal smuggling and emigrants’ remittances, are more important than fluctuations in the international exchange market.