Price development in Albania

Abstract

Even though inflation has been low in the last years in Albania and inside the target rate of about 3 percent determined by Bank of Albania, considering the relevance of this variable for economic activity there is room for careful analysis in order to make evident the potential threatens of domestic price stability. The main objective of this paper is twofold, first analyzing sub-indexes of CPI basket in order to determine the major volatile components, and second aim is to qualify the relative importance of different transmission mechanisms of monetary policy, by using VAR approach. The main finding of this work is that rent fuel and power that constitute the second large sub-indexes of CPI with the weight 24 percent have been the most volatile categories for time period 2000-2008, followed by food sub-index that has the highest weight in Albania CPI basket of about 43 percent. Econometric model has found evidence that money supply is important determinant factor for domestic inflation. There is an immediate response of inflation to shocks in the exchange rate. Even though the exchange rate continues to be an important variable for explaining inflation in Albania, with the development of financial market its importance will decrease. Total loans to GDP ratio in Albania have increased substantially in the last year, and we believe that the importance of lending channel will further increase in Albania with the development of financial market.