The Role of Macroeconomic Variables on the Yield Curve Model: Case of Albania

Albania is a country which has passed through a difficult transition period and surely this period has lead to some inevitable effects on the Albanian economy. The high inflation and the rapid decline of the economy contributed to the crisis which happened in 1997. After 1998 the economic progress and the inflation reduction were enabled by the fiscal and monetary policy strengthening. Much progress is made and this is seen in the continuous increase of gross domestic product growth rate. This research paper will analyze the relationship between term structure of interest rate and the two key variables which are inflation rate and GDP growth rate. The challenging correlation of these variables has been discussed by many economists. Some of the authors could introduce their yield curve model without the intervention of macroeconomic variables, while some others considered macroeconomic factors such as inflation rate and GDP growth rate in explaining the model. The focus of this paper is how the two key variables affected the interest rate. From the regression analysis, it is found that the macroeconomic variables explain about 16.3 % of the variation in the interest rate which is not a high percentage. These variables are not statistically significant and they can be drop out of the regression line. Keywords: interest rate, inflation rate, GDP growth rate, level, slope, curvature