The main determinants of inflation
            in Albania
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.