Central bank balance sheet and inflation in a euroised small open economy: a cointegrated SVAR analysis

Gent Sejko () and Altin Tanku ()
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Gent Sejko: Governor, Bank of Albania, Tirana, Albania
Altin Tanku: Director, Research Department, Bank of Albania, Tirana, Albania

Public Sector Economics, 2024, vol. 48, issue 4, 529-552

Abstract: The Bank of Albania has not employed traditional balance sheet policies; however, it has taken a series of policy actions that have increased the proportion of nonborrowed relative to borrowed components of the monetary base and its balance sheet liabilities. We aim to investigate whether these changes in the structure of the central bank balance sheet gave rise to additional monetary shocks with direct effects on inflation. The hypothesis is tested by estimating a small structural VAR model with cointegrated I(1) and I(0) policy and non-policy variables. We identify long-run restrictions based on the embedded structure of the data generating process, as defined by cointegration relationships. Our findings suggest that an increase in the share of non-borrowed components of the monetary base has direct and indirect positive effects on inflation. We argue that the identification of this monetary shock has significant implications for the central bank and its monetary policy.

Keywords: monetary policy; structural VAR; cointegration; permanent monetary injections; central bank balance sheet (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 F31 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:ipf:psejou:v:48:y:2024:i:4:p:529-552

DOI: 10.3326/pse.48.4.6

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