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Central bank balance sheet and inflation in a euroised small open economy: a cointegrated SVAR analysis

Author

Listed:
  • Gent Sejko

    (Governor, Bank of Albania, Tirana, Albania)

  • Altin Tanku

    (Director, Research Department, Bank of Albania, Tirana, Albania)

Abstract

The Bank of Albania has not employed traditional balance sheet policies; however, it has taken a series of policy actions that have increased the proportion of nonborrowed relative to borrowed components of the monetary base and its balance sheet liabilities. We aim to investigate whether these changes in the structure of the central bank balance sheet gave rise to additional monetary shocks with direct effects on inflation. The hypothesis is tested by estimating a small structural VAR model with cointegrated I(1) and I(0) policy and non-policy variables. We identify long-run restrictions based on the embedded structure of the data generating process, as defined by cointegration relationships. Our findings suggest that an increase in the share of non-borrowed components of the monetary base has direct and indirect positive effects on inflation. We argue that the identification of this monetary shock has significant implications for the central bank and its monetary policy.

Suggested Citation

  • Gent Sejko & Altin Tanku, 2024. "Central bank balance sheet and inflation in a euroised small open economy: a cointegrated SVAR analysis," Public Sector Economics, Institute of Public Finance, vol. 48(4), pages 529-552.
    • Handle: RePEc:ipf:psejou:v:48:y:2024:i:4:p:529-552
    DOI: 10.3326/pse.48.4.6
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    References listed on IDEAS

    as
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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