Forecasting Inflation using the ARIMA Approach (Case of Albania)

Abstract

Traditionally, macroeconomic statistics have played a major role in creating the framework for analyzing economic phenomena. Price changes are one of the most worrying situations where individuals, firms, and government tend to keep in control as much as possible. Even if the economic effect could be negligible, the psychological effect could be more considerable. Inflation creates a touchable impact in the vast majority of economic sectors. Meanwhile, empirical studies of inflation have shown a very correlative relationship between inflation and other macroeconomic indicators such as unemployment, GDP growth, net exports, etc. Albanian economy has suffered from time to time from inflation consequences. Simultaneously, inflation in Albania has created a cyclical form and a significant trend. Due to these conditions, simple econometric models such as ARMA or ARIMA can be used to forecast future inflation, especially at the moment when inflation is the focus of the Albanian economy. This paper aims to create an ARIMA econometric model of inflation in the time frame from 2009-2022. It also creates a quantitative approach for forecasting inflation in the Republic of Albania. Furthermore, this paper tries to explain some phenomena linked with inflation giving some qualitative data. ARIMA model will be used to forecast future inflation in Albania. Lastly, as explained in the paper, it is shown that the ARIMA model should be taken under consideration in policymaking processes.