ardian fullani : bank of albania – progress during 2006 speech by mr ardian fullani, governor of the bank of albania, at the “ round table on target inflation 2 ”, tirana, 8 december 2006. * * * ladies and gentlemen, i want to conclude this round table by thanking you all for your contributions. we are really happy that you came to tirana for discussing the monetary policy strategy of the bank of albania. this round table on inflation targeting was an excellent follow - up of the open forum. at the open forum last year in december we globally discussed the many preconditions for inflation targeting. during these two days of the round table, yesterday and today, we went far deeper on these complex issues. these issues need to be solved before the bank of albania can put a fully fletched inflation targeting regime into place. at this round table we have discussed the progress that the bank of albania has been making during 2006. one of the discussed topics was the econometric modeling and forecasting. the bank of albania uses now a reliable analytical framework that provides information useful to the monetary policy decision making. under inflation targeting more information would be needed about the expected inflation developments in the future. as laid down in the central bank law, the primary objective of the bank of albania is to achieve and maintain price stability in albania. for keeping prices stable we need to be able to forecast the development of prices in the future. our current econometric models provide us information about these future developments. our internal studies show now that the bank of albania is able to make reliable forecasts. we also discussed the consequences of situations where the consumer price index increases, let us say, more than 3 % at an annual basis. this may for instance happen due to higher electricity prices, or higher oil prices. these energy prices are a main share of our daily expenditures. therefore, they are a main share of the total basket of consumer prices for the “ average ” albanian household. however, the focus of our discussions was the analyses of the further impact on the albanian macro - economy. higher prices will lead to a lower purchasing power. households will buy less in case of a price increase, under the condition of unchanged household income. then, if many households in albania start consuming less, the albanian economic growth will suffer. the albanian production will slow down due to the overall lower demand for goods and services. this process can take some time. but, anyhow, each economist will agree that

strong increases in prices are bad for the economy. a high inflation, that is another way of saying a strong increase in prices, will harm economic growth. the bank of albania aims at an average increase of the consumer price index of 3 %. the bank of albania will set the interest rate for keeping expected price increases to 3 % plus or minus 1 percentage point. it has built a macro - econometric model with all these channels that transmit monetary policy in the albanian economy. the main purpose of the model is to analyze the reaction of prices, private consumption and business investment and so on, in reaction to changes that may take place. we call these changes in analytical terms “ shocks ” to the economy. our macro - econometric model is promising. very promising. but for building econometric models we need statistics. albania has statistics, but we need better statistics. for the year to come, the bank of albania wants to improve the statistical framework. the bank of albania needs better statistics, i said. with “ better ” statistics i mean here “ more ” statistics, “ reliable ” statistics and “ user - friendly ” statistics. we need to measure all macro - economic developments in the economy better. and we need to keep track of these developments. our albanian history is still short. we only have time series for about 15 years. in time we will logically have longer time series. our time series need to become timely available and they should be fully understandable. inside the bank of albania we can work more on statistics. in the year 2007 the bank of albania will improve its own database on monetary and financial statistics, and on the balance of payment statistics. but, for other statistics we depend upon our national statistical office, instat. we also depend on other institutions for providing us with relevant information. next to the broadening and deepening of the statistical framework the bank of albania will improve upon its communication with the public. we discussed during this round table the transparency of the bank of albania. we concluded that significant progress has been achieved. but next to transparency, the bank of albania wants to improve upon the information that it provides to the public. the bank of albania aims at making monetary policy understandable to everybody. we know already that money matters. the more money we possess, the more we can buy, and the more our economy will grow. the more our economy grows, the more people can share. poverty will be reduced. but what about monetary policy? we