Assessing the Dynamics of Nominal and Real Interest Rates in Long-Run: A Comprehensive Analysis of Albanian Interest Rates

As one of the key parameters of monetary policies conducted by the central banks, interest rates play a crucial role in both the saving and borrowing processes. The last three decades have shown that the economic performance of Albania has been strongly associated with the variation in nominal and real interest rates. Moreover, supply and demand shocks, in terms of real and nominal shocks, have a long-term impact on both nominal and real interest rates. This paper endeavours to examine the importance of nominal and real economic shocks and their long-run effects on loan interest rates for the last three decades in Albania. Throughout a structural vector autoregression model (SVAR) scope, imposing long-run restrictions and variance decomposition of nominal and real interest rates, this paper analyses the effectiveness of central bank intervention in controlling interest rates in Albania. Referring to accumulated impulse responses, nominal economic shocks do have a negligible effect on both nominal and real interest rates. Meanwhile, nominal economic shocks do have an additional impact in the long run on real interest rates in Albania. This paper recommends that policymaking institutions should take into account the effects of these economic shocks while drafting monetary and fiscal policies in a long-term perspective.