An Examination of the Relationship Between Inflation and Money Growth: Albanian Application

Abstract

This master thesis overviews the relationship between money growth and inflation as monetary policy framework of the BoA, concentrating on the later part on its current set-up, for attaining inflation stabilization in such a strong competitive environment. In this master thesis are explained inflation factors and the main types of inflation related to the money growth because inflation is always a monetary phenomenon. The aim of this thesis is to overview the monetary policy issues under different lights within the basic inflation expectations and targets in Albania over years, is it normal, or Albania is a problematic country and how it has changed over-time. As a methodology it was decided to use simple regression analysis for its simplicity, as the basis for measurement the relationship between money growth and inflation and of BoA performance in attaining inflation stabilization. This master thesis analyzes empirically the co-integrating relationship between inflation and money growth in the Albanian economy in 1993-2012. Since the variables in this thesis are non-stationary and present a unit root, Johansen’s co-integration technique has been applied. This methodology has allowed for obtaining of a co-integrating relationship among these variables. The co-integration results provide evidence of a unique co-integrating vector. In other words, a long-run stable relationship between inflation and money growth exist. This indicates that inflation and money growth move together in the long run in Albania.