Macroeconomic And Market Determinants Of Interest Rate Spread: Evidence From Albania
The banking system, as the most important component of the financial system in Albania, plays a crucial role in economic development. Measuring the efficiency of the intermediation system requires special attention because of its implications on the level of investments, savings, resource allocation etc. The most common indicator for the efficiency of the banking system is the cost of intermediation, measured by the spread of interest rates (the difference between the average lending rate and the average deposit rate). The study aims to analyze the trend of interest rate spread (IRS) in Albania for the period 2005-2014 based on a comparative analysis with other countries and to identify the factors with significant impact on the level of IRS in the local currency. It is based on the empirical analysis of several macroeconomic and market factors that determine IRS, used in previous studies in this field, but also incorporating other elements that are associated with the characteristics of the Albanian system. Albania has experienced high IRS during the last decade, with large fluctuations, especially in the local currency. The results of the study based on quarterly panel data for the period 2005-2014 show that IRS in Albania is negatively affected by the level of development of the banking sector and the discount rate, while inflation, deficit rate and monetary supply put positive pressure on this indicator.
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