Effectiveness of Monetary and Fiscal Policy on GDP Growth: An Empirical Investigation for Albania

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.