Developing an ecological macroeconomic model for the Bank of Albania

Principal Investigator

• Yannis Dafermos (SOAS University of London)

Co-investigator

• Adam George (SOAS University of London)

Funders

• Geneva Graduate Institute/Swiss Secretariat for Economic Affairs (BCC programme)

Duration

• 2024-2025

Albania faces several environmental challenges, including the increase in the frequency and severity of floods and forest fires, as well as the growing water stress problems that affect electricity generation. 

Mitigating the adverse effects of environmental change on socio-economic and macrofinancial resilience requires the implementation of several environmental adaptation policies. At the same time, Albania has plans for decarbonising its economy in line with its Nationally Determined Contributions, but it is unclear what is the best policy mix that can achieve high environmental benefits without causing macrofinancial instability.     

This project develops an ecological macroeconomic model for Albania that allows the Bank of Albania to analyse the effects of environmental change and environmental policies on the Albanian macroeconomy and financial system using scenario analysis. The model also sheds light on what combination of policies might generate better outcomes from an environmental and macrofinancial perspective.  

The model relies on the methodological principles of the DEFINE-UK model which uses stock-flow consistent and macroeconometric techniques to capture the dynamics of macroeconomic, financial and environmental variables. The approach adopted in the project ensures that the model successfully incorporates the key features of the Albanian economy. For example, the monetary transactions and the asset and liabilities that are included in the model are selected based on the national accounting data of the Albanian economy. The project also pays special attention to the formulation of environment-related macrofinancial feedback loops, which are typically absent in standard macroeconomic models that analyse environmental issues. 

Header Image Credit: Seval Torun via Unsplash.