Inflation, exchange rates and the role of monetary policy in Albania

This paper examines monetary policy in Albania during the transition period. Various channels through which monetary policy can affect prices and output are identified and their relative importance is assessed. Estimates from a vector autoregression model (VAR) of key macroeconomic variables demonstrate the weak link between money supply and inflation up to mid-2000. However, the move during 2000 from direct to indirect instruments of monetary control has been associated with greater predictability of the transmission link from money supply to inflation. The paper concludes that a move to formal inflation targeting could help promote the transparency and credibility of monetary policy, but that such a move should be introduced only when the country is ready for it.