Quantitative Easing (QE) in Albania as a tool for Stability and Growth

Since 2020, the Albanian economy has faced a series of complex challenges. On one hand, inflation has experienced a significant increase, driven not only by domestic factors but also by turmoil and risks in the global economy. On the other hand, public debt has contracted in nominal terms, mainly as a consequence of the accounting depreciation of the lek against the euro, as well as careful management of public spending, which has kept the budget deficit under control and limited fiscal risks.

In this context, discussions about the use of advanced monetary policies such as Quantitative Easing (QE) are gaining increasing importance in Albania.

QE should not be seen merely as a financial instrument involving the central bank’s asset purchases, but as a powerful tool that can help stabilize the economy during periods of deep crises, providing a direct impulse for growth in output and inflation, as well as delivering significant fiscal benefits by reducing public debt servicing costs.

The experience of developed countries such as the United States, the United Kingdom, and Japan provides clear examples of how QE has helped overcome deep financial and economic crises.

After the global crisis of 2008, the U.S. Federal Reserve launched a series of asset purchase programs that helped reduce long-term interest rates and boost credit. In the European Union, the European Central Bank used QE to stabilize eurozone economies, especially during the sovereign debt crisis. In Japan, QE has been a key instrument to combat chronic deflation.

The International Monetary Fund (IMF), in its recent reports, emphasizes that QE is particularly effective when interest rates are near or at zero and when economies face “deep liquidity traps” or prolonged recessions. Under these circumstances, the use of QE can stimulate aggregate demand, help bring inflation back toward target, and improve the government’s fiscal position by lowering debt servicing costs.

In the case of Albania, where post-pandemic challenges and global factors have affected a fragile economy, QE can be considered an additional instrument for monetary policy, provided it is implemented carefully, taking into account the specific characteristics of the financial market and the need for close coordination with fiscal policy.

Recent international modeling and studies on Quantitative Easing (QE) show that this instrument, if applied prudently, can provide substantial support in restoring economic growth and stabilizing inflation in an economy trapped in a “deep liquidity trap,” where interest rates are constrained at or near zero or even negative levels.

In such a situation, the traditional effectiveness of interest rate policy diminishes, and QE works by lowering the term premium (the premium investors require to hold long-term bonds relative to short-term bonds). This reduction in the term premium improves financing conditions for the government and the private sector, stimulating investment and consumption. Additionally, as economic activity increases, inflation rises toward the central bank’s target, improving inflation expectations essential for monetary policy effectiveness.

On the fiscal side, QE helps reduce the public debt servicing burden in several intertwined ways:
First, lowering interest rates and the term premium reduces borrowing costs for the government.
Second, rising inflation decreases the real value of existing debt.
Third, economic growth improves the tax base, increasing budget revenues and enhancing fiscal sustainability.

In Albania’s case, which has recorded a nominal decline in public debt in recent years, primarily due to lek depreciation and conservative deficit management, inflation and financial stability challenges remain present. This creates space to consider adopting an integrated approach where QE is accompanied by fiscal policy to achieve macroeconomic goals without jeopardizing the credibility of the Bank of Albania or financial system stability.

The Bank of Albania’s modeling in this regard employs an advanced Dynamic Stochastic General Equilibrium (DSGE) framework that integrates factors such as segmented bond markets (to capture QE’s effect on the term premium), nominal and real rigidities (such as sticky prices, wages, and consumer preferences), and a nonlinear Phillips Curve, which allows analysis of overheating risks.

These models show that if QE is implemented in a “deep liquidity trap,” the positive effects on output and inflation are significant, while fiscal benefits appear through reduced debt costs and improved consolidated fiscal balance.

On the other hand, the IMF, in its reports on Albania and economies with similar characteristics, recommends further development of the capital market and strengthening institutional capacities to manage unconventional monetary policies. The IMF stresses the importance of:
• Ensuring a deep and liquid sovereign bond market to facilitate QE effectiveness.
• Monitoring financial risks arising from central bank balance sheet expansion.
• Tight coordination between fiscal and monetary policies to preserve credibility and macroeconomic stability.

A technical example from the latest Bank of Albania monetary policy report shows that a QE program equivalent to 10% of GDP during a crisis period could lower long-term interest rates by about 50-70 basis points and increase real output by 1.5-2%, positively impacting the debt-to-GDP ratio by a few percentage points over several years.

From the perspective of the ALTax platform, which has addressed this topic with scientific rigor and without prejudice, Albania’s approach to the use of advanced monetary policies such as Quantitative Easing should be fully balanced and cautious. QE can serve as an important and effective instrument during moments of deep economic crises and constrained liquidity, bringing significant boosts to the economy and improving fiscal sustainability. However, it should not be considered an exclusive solution or a substitute for other policies.

In this context, monetary and fiscal policies must proceed in parallel and be well coordinated, strongly relying on empirical evidence and adapting to the unique conditions of Albania’s financial market and economic reality, as well as global economic trends and risks.