Abstract: In a small open economy such as Albania, the exchange rate significantly influences various economic dimensions, including price levels, the balance of payments, productivity, the stock of foreign assets, and the attraction of foreign capital. This paper seeks to analyze exchange rate volatility within the framework of several macroeconomic determinants and their association with the real exchange rate (RER). Specifically, the study inspects exchange rate instability and its effects on macroeconomic variables that show statistically meaningful relationships with the RER. The analysis covers the period 2015–2024 and utilizes quarterly time series for each considered variable as independent and dependent measures. The examined macroeconomic variables include the real exchange rate, the relative productivity gap with trading partners, net foreign assets, trade openness, and government public spending. The Behavioral Equilibrium Exchange Rate (BEER) methodology is applied to assess how these key fundamentals shaped RER volatility over the sample. Empirical findings corroborate earlier results showing that the RER deviates from its equilibrium, and they identify the relative productivity gap and net foreign assets as the primary drivers of RER volatility. Both factors exert negative influences, implying that their expansion strengthens the domestic currency vis-à-vis foreign currencies. Moreover, RER volatility itself exerts a statistically significant effect on GDP and export volumes. Although divergence of RER from equilibrium appeared limited during the study interval, the business community remained vigilant about domestic currency movements against foreign currencies. This research enriches the exchange rate literature for small open economies by providing novel BEER-based empirical evidence from Albania. It also offers actionable insights for policymakers, firms, and investors to better appraise exchange-rate risk and to devise policies that favor stability and sustainable growth.

Keywords: Real Exchange Rate, The difference in productivity, BEER, Volatility, Economic factors

Pages: 535-547

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