Inflation and stabilisation in Albania

This article analyses the determinants of inflation in Albania during the transition period. We attempt to explain why Albania was successful in reducing inflation, by the end of 1995, to a level comparable to many countries in the European Union. We discuss the relative importance of monetary, fiscal and external variables, and we highlight the role of remittances by emigrants. Using vector autoregression analysis, we demonstrate how shocks to money growth and remittances affect the subsequent paths of inflation and the exchange rate. Our main conclusion is that, while there are important lessons from the Albanian experience for other ex-communist countries, the presence of large-scale emigration and huge I-emittance flows makes Albania unique among European countries in transition, in the extent to which these factors aided the anti-inflation programme. However, recent events have demonstrated that political stability and control of the informal financial sector ai-e also crucial for low inflation.