IDEAS home Printed from
   My bibliography  Save this paper

The main determinants of inflation in Albania


  • Domac, Iker
  • Elbirt, Carolos


The authors investigate the behavior and determinants of inflation in Albania, using three approaches. They decompose inflation into four components: seasonal, cyclical, trend, and random: rely on the widely used Granger causality test, using disaggregated data on both the consumer price index (CPI) and key economic variables; and apply cointegration and error correction techniques to the process of inflation, using a simple theoretical model. Using the first approach, they conclude that inflation exhibits strong seasonal patterns associated with agriculture seasonality. Peaks and troughs of monetary aggregates correspond to those of inflation, with a two-month lag. The exchange rate also exhibits stable seasonality, reaching its trough in August and tending to depreciate early in the year. The Granger causality test shows M1 (currency in circulation plus demand deposits) and the exchange rate to have predictive content for most items of the CPI. The empirical findings also indicate that credit to government is a good predictor of medical care, transportation, and communication prices. But causality also runs from the prices of bread and cereals, recreation, education, and culture to credit to government, since these items, at least during the period under consideration, are subsidized and contribute to the budget deficit. And causality runs from credit to government to the price of nontradables, highlighting the fact that an increase in the fiscal deficit would undermine Albania's competitiveness by producing appreciation in the real exchange rates. The results of cointegration and error-correction techniques confirm that, in the long run, inflation is positively related to both money supply and the exchange rate, and negatively related to real income. A 1-percent increase in M1, for example will raise inflation by 0.41 percent; a 1-percent depreciation of the exchange rate will increase inflation by 0.17 percent; whereas a 1-percent increase in real income will reduce inflation by 0.25. Inflation adjusts to its equilibrium value fairly rapidly - 25 percent a month. The impact of the exchange rate on inflation occurs a month later, while the impact of real income and money takes place two and four months later, respectively. The findings support the conventional elements of a typical stabilization program. Fighting inflation and keeping exports competitive requires reducing both the budget deficit and credit to government. The strong seasonal nature of inflation can be somewhat ameliorated by improving infrastructure and customs services. Structural reforms and improvements in infrastructure should be part of any stabilization program because economic growth contributes to containing inflation.

Suggested Citation

  • Domac, Iker & Elbirt, Carolos, 1998. "The main determinants of inflation in Albania," Policy Research Working Paper Series 1930, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1930

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Davidson, Russell & MacKinnon, James G, 1981. "Several Tests for Model Specification in the Presence of Alternative Hypotheses," Econometrica, Econometric Society, vol. 49(3), pages 781-793, May.
    2. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    3. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    4. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-492, June.
    5. Ireland, Jonathan & Wren-Lewis, Simon, 1992. "Buffer Stock Money and the Company Sector," Oxford Economic Papers, Oxford University Press, vol. 44(2), pages 209-231, April.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Nigina QURBANALIEVA, 2013. "An Empirical Study Of Factors Affecting Inflation In Republic Of Tajikistan," Theoretical and Practical Research in the Economic Fields, ASERS Publishing, vol. 4(2), pages 231-249.
    2. repec:onb:oenbfi:y:2005:i:1:b:5 is not listed on IDEAS

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Martin Schmidt, 2003. "Monetary dynamics: a market approach," Applied Economics, Taylor & Francis Journals, vol. 35(2), pages 139-152.
    2. Adrian C. Darnell, 1994. "A Dictionary Of Econometrics," Books, Edward Elgar Publishing, number 118.
    3. Srinivasan Palamalai & Kalaivani Mariappan & Christopher Devakumar, 2014. "On the Temporal Causal Relationship Between Macroeconomic Variables," SAGE Open, , vol. 4(1), pages 21582440145, February.
    4. Inoue, Atsushi, 1999. "Tests of cointegrating rank with a trend-break," Journal of Econometrics, Elsevier, vol. 90(2), pages 215-237, June.
    5. Toru Konishi & Valerie A. Ramey & Clive W.J. Granger, 1993. "Stochastic Trends and Short-Run Relationships Between Financial Variables and Real Activity," NBER Working Papers 4275, National Bureau of Economic Research, Inc.
    6. Charles G. Renfro, 2009. "The Practice of Econometric Theory," Advanced Studies in Theoretical and Applied Econometrics, Springer, number 978-3-540-75571-5, enero-jun.
    7. Julia Campos & Neil R. Ericsson & David F. Hendry, 2005. "General-to-specific modeling: an overview and selected bibliography," International Finance Discussion Papers 838, Board of Governors of the Federal Reserve System (U.S.).
    8. Choudhry, Taufiq, 2002. "Money-Income Relationships between Three ERM Countries," Journal of Applied Economics, Universidad del CEMA, vol. 5(1), pages 1-37, May.
    9. Leigh Drake & Andy Mullineux & Juda Agung, 1997. "One Divisia money for Europe?," Applied Economics, Taylor & Francis Journals, vol. 29(6), pages 775-786.
    10. Shoesmith, Gary L., 1995. "Multiple cointegrating vectors, error correction, and forecasting with Litterman's model," International Journal of Forecasting, Elsevier, vol. 11(4), pages 557-567, December.
    11. Maslov, Alexander, 2011. "Inflationary Handicap Of The Monetary Transmission Mechanism: Evidence From Russia," MPRA Paper 50036, University Library of Munich, Germany, revised 12 Apr 2012.
    12. Ben-Salha, Ousama & Jaidi, Zied, 2014. "Some new evidence on the determinants of money demand in developing countries – A case study of Tunisia," The Journal of Economic Asymmetries, Elsevier, vol. 11(C), pages 30-45.
    13. William Barnett & Barry E. Jones & Milka Kirova & Travis D. Nesmith & Meenakshi Pasupathy1, 2004. "The Nonlinear Skeletons in the Closet," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200403, University of Kansas, Department of Economics, revised May 2004.
    14. Martin Schmidt, 2003. "Money and prices: evidence from the G7 countries," Applied Economics, Taylor & Francis Journals, vol. 35(17), pages 1799-1809.
    15. Imad Moosa, 1994. "Testing nonlinearities in purchasing power parity," Applied Economics Letters, Taylor & Francis Journals, vol. 1(3), pages 41-43.
    16. P., Srinivasan & M., Kalaivani, 2013. "On the Temporal Causal Relationship between Macroeconomic Variables: Empirical Evidence from India," MPRA Paper 46803, University Library of Munich, Germany.
    17. Giorgio Valente & Lucio Sarno, 2005. "Modelling and forecasting stock returns: exploiting the futures market, regime shifts and international spillovers," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(3), pages 345-376.
    18. Taufiq Choudhry, 2002. "Money-Income Relationships between Three ERM Countries," Journal of Applied Economics, Universidad del CEMA, vol. 5, pages 59-94, May.
    19. Lee, Chien-Chiang & Chen, Pei-Fen & Chang, Chun-Ping, 2007. "Testing linearity in a cointegrating STR model for the money demand function: International evidence from G-7 countries," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 76(4), pages 293-302.
    20. John Sequeira & MICHAEL McALEER, 2000. "Testing the risk premium and cost-of-carry hypotheses for currency futures contracts," Applied Financial Economics, Taylor & Francis Journals, vol. 10(3), pages 277-289.


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1930. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Roula I. Yazigi (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.