path of the fiscal policy is reflected in both revenue increase and spending decrease. the performance of revenues was affected by the rapid increase of tax revenues, due to the effects of the new fiscal package and improvement of the tax system administration. on the other hand, budget expenditure fell both for current and capital expenditure categories. budget deficit stood at around all 22. 2 billion, at the end of the first six months, or around 54 % lower than in the previous year. the bank of albania supports the measures for fiscal consolidation, as the pursuit of such a policy contributes to maintaining long - term stability and reducing risk premiums in the economy. however, the bank of albania reiterates the need for a more uniform distribution of expenditure and budget deficit throughout the year, in order to minimise the volatility in economic activity and financial markets. financial markets were relatively calm during july and august. the activity in these markets ranged in normal levels, characterised by contained liquidity pressures and small fluctuations in interest rates. in response to the stimulating monetary policy, markets tended bis central bankers ’ speeches to reduce interest rates, although the intensity of reduction varied across market segments. thus, a faster reduction of interest rates has been noted in the interbank market, on lek deposits and in the short - term segment of government securities. on the other hand, the interest rates on long - term government securities and on credit fell at a slower pace. the latter continue to reflect high risk premiums, related both to the burdened balance sheet of albanian businesses and the conservative lending policies adopted by banking groups. annual growth of money supply was 0. 9 % in june. its performance reflected the low need for funds by the public sector and the decline in credit to the private sector. the annual decline of credit to the private sector was 1. 8 % in june, maintaining the same pace as in may. in the meantime, in monthly terms, credit grew for the second consecutive month, albeit at lower levels than the historical ones. signals for eased standards of supply and growth of credit demand, obtained from the surveys conducted in the second quarter, seem to materialise slowly in improved credit performance. as we have previously stated, the tightened lending standards and the sluggish credit performance is a regional and european phenomenon, which may be solved only in the presence of the steady growth of the domestic economy and the complete calming down of european financial markets. the bank of albania deems that the country ’ s reality and perspective require adopting

seven million person - days were lost to strikes each year. this was an enormous loss of output. high and variable inflation also triggered large wage settlements. this fuelled inflation expectations and contributed to both a wage - price spiral and a wage - wage spiral. 3 in the economics literature of the day, there was a lot of confusion over the role that inflation expectations play in the wage - formation process. the literature stressed that workers and unions sought to catch up with inflation that had already occurred. but against this background, milton friedman argued that forward - looking expectations were more important in wage bargaining than catching up with past inflation. in particular, he stressed that workers bargain over real, and not nominal, wages. when signing a new contract, workers demand higher wages if they expect prices to increase over the life of the contract so as to preserve their real wages. the oral presentation by governor dodge at memorial university is an abridged version of this paper. the governor would like to thank robert fay, assistant chief, research department, bank of canada, for his contribution to this paper. variability is measured as the standard deviation. at the time, workers and unions were pushing for wage increases to compensate them for the risk of higher inflation over the life of their contracts. but employers in some sectors were also willing to offer high wage increases. the public sector, for example, saw larger revenues with rising inflation. and some firms in the private sector experienced a boost in profits generated by inflation and were therefore willing to grant relatively large wage increases. in some cases, this led workers and unions to demand similarly large wage increases, irrespective of the conditions in their particular sector. thus, he argued that it is not the recently observed rate of inflation, but rather the expected rate of inflation that plays a prominent role in wage - setting. but with inflation rising and becoming more variable, there was considerable uncertainty over what the future rate of inflation would be. indeed, high and variable inflation meant that there was no anchor for inflation expectations, and this lack of an anchor led to considerable turbulence in wage - setting. 4 although contractionary macroeconomic policies were required to lower the double - digit inflation rate, such policies operate with a lag and would have resulted in higher levels of unemployment during the transition period. one train of thought in the early to mid - 1970s was that temporary wage and price controls could alleviate the negative impact on unemployment by ensuring that, over a period of time, wage - and price - setting