Interest rate modeling for Albania

Abstract

The success of monetary policy in stabilizing prices or inflation targeting depends in large measure by the immobility of market interest rates in response to changes in policy rates. Thus the rate of transmission of interest rate depends greatly on the conditions prevailing in the credit markets and deposits; and consequently, the monetary authorities should consider these conditions and the behavior of banks in determining their policies. A change in the policy rate is reflected in an almost immediate change in the same direction and with similar proportions of short-term interest rates of bank lending and deposits. The speed at which these rates are regulated, depends on the characteristics and depth of the market, the strength of competition among financial institutions, etc.. On the other hand, after changing the key, long-term interest rates could move in the same direction, so as in reverse. Changes in real interest rates affect income and expenses, through the replacement channel, wealth, income and cost of capital. Changes in interest rates may have contradictory effects, because they affect the behavior of savers, as well as that of the borrowers. This paper deals with the construction of a suitable model for interest rate, based on a time series of interest rate for a time period outreach from August 1995 to October 2014. The aim is this model to be used for forecasting interest rate in future periods. Box-Jenkins analysis is used for modeling interest rate series. ARIMA models and SARIMA will be used for the series of interest rate.