Relationship between Exchange Rate and Trade Balance Pre and after COVID-19 – Albania Case Study

Abstract

This study attempts to identify the relationship between the real exchange rate and trade balance in Albania with its major trading partner Italy. Due to the severe lockdown and restrictions policies in response to Covid-19 measures, there were important effects on the evolution of trade. Quarterly data from 2008 to 2022 are used in several econometric methods such as unit root tests, cointegration techniques, Granger test, and vector error correction model (VECM). The main findings of this study are that domestic income and exchange rate show a long-run positive relationship to the trade balances. Devaluation of the domestic currency will improve the trade balance in the long run, consistent with the Marshall-Lerner condition.