On the other hand, the fiscal stimulus is estimated to have trended downward in the third and fourth quarters, albeit budget revenues and expenditure have continued to record high growth rates. The constant expansion of the aggregate demand has led to an increasingly higher utilisation of production capacities. The unemployment rate fell to 13.6% in the third quarter, down by 1.1 percentage points from the same quarter in the previous year. However, the gradual convergence of the economy toward its equilibrium is yet to be accompanied by upward inflationary pressures, sufficient enough for the return of inflation to target. Our accommodative monetary policy stance has reduced the costs of financing for the private sector, has boosted crediting in the domestic currency and has contributed to the improvement of the borrowers’ financial situation. In the last months, financial markets have performed relatively calm, amid low interest rates, controlled risk premia and the exchange rate set on a stabilisation trend. Banking system Year 2017 was positive in terms of the expansion and soundness of banking activity in Albania. A quick glance at the performance in the 10-month period corroborates this conclusion. Banking sector’s assets expanded further during the period, at 4%, in annual terms. The financial situation of the sector and activity capitalisation improved. Due to the considerable fall of loan provisioning, the financial result improved notably compared to the previous year. Also, the RoA and RoE indicators doubled at 1.6% and 16.3%, respectively, from 0.74% and 7.8%, in the previous year.

Such attempts are likely to impart an excessive activism to policy-making, such that interest rate decisions add volatility to the economy rather than stabilise it. In adopting an appropriate medium-term orientation, monetary policy-makers are accorded an extra “degree of freedom” in setting the policy stance. There can be several paths of interest rates consistent with the maintenance of price stability over the longer run. At least in principle, the choice of a specific path can be used to support broader purposes, without prejudicing the outlook for price stability over the medium term. This has been recognised by the so-called flexible inflation targeting literature. 10 This framework explicitly foresees the use of monetary policy to smooth developments in economic activity over the business cycle, while anchoring longer-term inflation expectations at levels consistent with price stability. In principle, the flexibility accorded to policy-makers by the medium-term orientation of monetary policy could be used in other directions, such as to contain financial imbalances or limit asset price volatility. The feasibility and desirability of such alternative approaches rests crucially on how monetary policy actions are perceived to be transmitted to the economy in general, and the price level in particular – in other words, on the perception of the structure of the economy and the monetary policy transmission mechanism. 2. The monetary policy transmission mechanism  The desirability of flexible inflation targeting was established using the canonical New Keynesian model.