Inflation and Money Demand in Albania (Electronic book text)

Inflation and money demand developments in Albania during 1993-97 took place in the context of a dramatic transition to a market economy, marked by substantial changes in institutional structures and in the policy-making environment. During 1993-95, significant progress was made in economic stabilization: inflation was brought down from near hyperinflation levels, real output grew rapidly, and reserves were built up to a comfortable level (Table 1, Figure 1). The stabilization effort was based on tight financial policies: the budget deficit was reduced substantially and monetary management was prudent. With the economy's growing import needs financed by a large volume of remittances and generous foreign aid, Albania's floating exchange rate moved within a small band over the three-year period, a feature that continued during 1996. This stability in the policy environment and the favorable outcome may have formed the basis for a decline in inflationary expectations and stable exchange rate expectations, making for stable relationships between the price level, money, and the exchange rate.