And if structural reforms are well-designed along these parameters, they can in fact have a largely neutral, if not positive impact on short-term demand – and even in adverse cyclical conditions. Credibility of reforms First, if reforms are credible their positive effects on short-term demand, via confidence, can more than compensate for any negative effects on inflation via increased supply. This is because, for firms, an upward shift in potential growth implies higher expected revenues and higher future profitability, which should in turn encourage them to bring forward investment into the present. And investment, remember, raises both supply tomorrow and demand today. It can therefore in no way be construed as being detrimental to our monetary policy objective. A similar logic applies to households and their life-cycle income. Reforms that raise expectations of life-cycle income should immediately support current consumption. To give just one example of this effect, an extension of the retirement age should lift not only medium-term supply – by expanding the active population – but also short-term demand, by reducing the need for precautionary savings ahead of retirement. But credibility is crucial in determining how quickly these positive effects materialise. If there is uncertainty about the timeline over which reforms will be implemented, or about the commitment of successive governments to maintaining them, it will take longer for firms and households to adjust their expectations and the benefits of reforms will be delayed.
Direct control on money growth, credit growth and interest rates were the operational tools of monetary policy aiming at the control of money supply, which served as the intermediate objective. A free floating regime of exchange rate was chosen to match the monetary targets. Other forms of exchange rate regimes were never discussed due to lack of adequate foreign exchange reserves and therefore the incapability to support a fixed rate of domestic currency. In addition the floating regime was chosen as an automatic stabilizer of the fast growing current deficits. Therefore the choice between different alternatives of stabilization program was conditioned (and easy). In general this regime has resulted successful and still continues to be the operating framework of the monetary policy. I believe that its success was conditioned by low financial intermediation and under developed financial markets . The presumed stable relationship between money and transactions and permitted for confident monetary programming based on the Fisher’s equation of exchange. However, as the efficiency and speed of financial intermediation increased and financial innovation set in motion, this policy setup become obsolete. Bank of Albania moved away from direct control on money in favor of indirect control of money supply in the economy. In the context of reviewing our approach to monetary policy during the recent years we have dedicated the bulk of our research and analytical resources to better understand the relationship and causality between inflation and economic factors that influence it in the context of Albanian economy.