AN EMPIRICAL INVESTIGATION OF THE PHILLIPS CURVE RELATIONSHIP FOR THE ALBANIAN ECONOMY

Agim Kukeli
University of New York Tirana
ABSTRACT
This study uses the basic Phillips curve together with the Augmented Phillips Curve
(APC) methodological frameworks to empirically investigate the short-run relationship between
inflation and unemployment in the Albanian economy. Using quarterly data on inflation during
1999–2011, it estimates six different models using the Cochrane–Orcutt econometric method. The
estimation results confirm the robustness of a short-run inverse relationship between inflation and
unemployment and thus the existence of the Phillips curve for the Albanian economy. In addition,
these results show that the APC is flatter with backward-looking expectations compared to the
APC with forward-looking expectations. The incorporation of dummy variables into the inflation
equations that represent different Central bank governance regimes in Albania indicate that
differences in Bank governorship have no significant effects on inflation, perhaps indicating an
independent and sound monetary policy. However, further investigations are required to confirm
this result. The findings could be useful for inflation forecasts, policy simulation, and for
analyzing monetary policy.