Combining monetary, fiscal and structural approaches to model Albanian inflation

Amidst the prevailing global economic uncertainty and rising commodity prices, this article investigates empirically the driving forces of inflation in Albania through combining several approaches, focusing especially on the developments in the food sector in general and cereals in particular, during the period from 2000 to 2022. Considering four measures of inflation such as: cereals, food, non-food, and headline inflation, it analysis the effects of domestic and foreign factors on inflation, using a vector error correction model (VECM), which allows to capture both the short-term and long-term effects. The study also considers the fiscal sector in examining inflation dynamics, which has been neglected so far in the current studies on this topic. The empirical analysis finds that domestic inflation is underpinned by disequilibria in the monetary, cereals and non-food sectors; in the short-run, inflation is driven by structural factors (particularly agricultural output gap and imported inflation), as well as demand-side factors (especially money growth and public sector borrowing).