THE ALBANIAN RECORD

A key test of whether a central bank has been conducting successful monetary policy is the extent to which people ‘trust ’ their money. In this paper we assess the Bank of Albania’s effectiveness by analysing conventional monetary policy transmission mechanisms and by analysing evidence of inflation expectations. The low level of financial intermediation and rampant unofficial dollarisation and euroisation represent serious constraints to the transmission process. Furthermore, we take differences in long-term interest rates between hard currencies and the Albanian Lek as tentative evidence that inflation expectations have not yet stabilised at a low level, despite the fact that inflation has been low and stable in recent years. Exogenous events, such as the steady inflow of remittances, contributed to the steady inflation record, because they supported the exchange rate and limited inflationary pressures from the demand side. Confidence in the conduct of monetary policy and the stability of the banking system should create low and stable inflation expectations. If these are achieved, steps could be taken towards inflation targeting. In our view, further reform should address four points: (i) Reducing the amount of dollarisation, because real economic linkages are overwhelmingly with Europe. (ii) Th