Abstract:
This study investigates how fiscal and monetary policy affects GDP growth in Albania
between 1998 and 2023 using time series data. The World Bank Indicators provided the data
for the time series analysis conducted using the software EViews. An Autoregressive
Distributed Lag (ARDL) model establishes the short- and long-run relationships between
variables, where the ARDL is composed of broad money, real interest rate, inflation, gross
capital formation, and final government consumption as independent variables, with GDP
growth as the dependent variable. Thereafter, a series of diagnostic tests are conducted for
heteroscedasticity, serial correlation, normality, Q statistic, Granger causality, unit roots, and
the stability of the model. The output of the final regression results shows that our model has
a long-run relationship; specifically, CAPF (capital formation) has a positive relationship
with GDP growth, while BM (broad money) and GCexp (government consumption
expenditure) have a negative effect on the dependent variable. In the short run, CAPF
continues to stimulate GDP growth, while inflation has a significant negative relationship
with it. This study fills an important gap in the literature by providing an updated empirical
assessment for Albania a small, open, transition economy using recent data and a robust
ARDL methodology. Based on the literature, our study suggests that investments should be
promoted and that more focus should be placed on monetary and fiscal policy as two
important instruments for GDP.
