THE CHANGING DYNAMICS OF ALBANIAN INFLATION: A QUANTILE REGRESSION APPROACH

Inflation in Albania dropped below the central bank’s target of 3% in 2012 and has fluctuated below target until end-2021. In this article we investigate the evolution of inflation risks in Albania and its main drivers. We use quantile regressions to estimate the three-month-ahead density forecast of inflation, derived from a Phillips curve for a small open economy. This methodology provides a measure to quantify the uncertainty surrounding the main estimation. The in-sample results reveal significant time variation in the shape of the distribution of inflation and considerable nonlinearities in the effects of the explanatory variables, beyond the volatility. On average the inflation distribution results skewed on the positive side. We find that inflation react more to cyclical conditions and exchange rate movements in the right tail of the distribution.