An Empirical Assessment on the Relations Between the Euro Exchange Rate, Trade Balance and the Consumer Price Index: Case of Albania

Abstract

As economic theory postulates, there are some relashionships between currency exchange rates, Consumer Price Index and External Trade Balance,. Normally, as exchange rates for the national currency go up, imports are supposed to go up as well, whereas exports are expected to go down. The opposite happens with a devaluating national currency. Additionally, Consumer Price Index is expected to go up with more expensive euros or dollars against ALL. More imports, particularly imports with higher prices, mean higher consumer prices, in a country relaying heavily on imports. We undertake this study to empirically and statististically estimate these relationaships, as far as there are no models used from Albanian institutions that deal with macroeconomic issues or forecasts. If these estimates confirm theory, this may mean that the economic principles, free and fair competition in particular, are working properly in Albania. In addition, we attempt to know how strong is correlation betewen these variables. Further on, we try to make short term forecasts for the echange rates of euro. The indicators used in our model are predicting the trends and relations among exchange rate, CPI and trade balance, although the data series are limited.