Using Macrofinancial Models to Simulate Macroeconomic Developments During the COVID-19 Pandemic: The Case of Albania

ABSTRACT

The COVID-19 pandemic, and its impact on the economy tested the capacity of current macroeconomic models to forecast economic developments in turbulent times. In this article, we develop a linear macrofinancial model for Albania and examine whether it can predict the developments of key macroeconomic and financial variables during 2020–2021. To address increased uncertainty in the forecasts, we construct uncertainty bands with quantile regressions. The results indicate that, in general, a linear model is flexible enough to analyze non-linear events and may thus be used in abnormal times.

KEYWORDS:

• COVID-19 pandemic
• macro-financial modeling
• quantile regression
• uncertainty bands

JEL CLASSIFICATION:

• E66
• C53
• C32

Acknowledgments

We thank two anonymous referees for useful comments. The responsibility for all remaining errors and omissions rests solely on us. The views presented in this paper are those of the authors and do not necessarily reflect the official view of the Bank of Albania or any other authors’ affiliations.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Figure A1 in Appendix shows the descriptive statistics of selected add-factors over 2010–2019.

2. Although, we let untouched the supply side indicators from the impact of earthquake in last quarter of 2019, here we have included the reconstruction plan due to the spill-overs on the demand side, the implications in the simulation, and the impacts of the lockdown in the reconstruction plan.

Additional information

Funding

Adam Geršl thanks the Cooperation Program at Charles University, research area Economics, for support.

Notes on contributors

Lorena Skufi

Lorena Skufi is Senior Economist at Bank of Albania’s Monetary Policy Department and PhD student at Charles University in Prague, Czech Republic. She was a researcher at the Research Department and Assistant Professor of Monetary Policy and Macroeconomics at University of Tirana, Albania until 2015. Her research is focused on macro-financial issues with a particular emphasis on modeling and forecasting.

Adam Geršl

Adam Geršl is Associate Professor and Director of Master Studies in Economics and Finance at Charles University in Prague, Czech Republic. In his research, he focuses on macro-financial linkages, banking, and macroeconomic policies. In the past, he also worked for the Czech National Bank, European Central Bank, and the IMF Regional Training Center in Vienna, Austria.