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Dual Inflation Under the Currency Board: The Challenges of Bulgarian EU Accession

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  • Nikolay Nenovsky

    ()

  • Kalina Dimitrova

    ()

Abstract

The importance of analysing inflation sources and dynamics in Bulgaria is imposed by (i) the long run process of price and inflation convergence to the Euro area and (ii) by the Currency Board operating in the country. In this study we make an attempt to estimate Balassa - Samuelson (BS) effect in Bulgaria (after the introduction of the Currency Board). The BS explanation of inflation (or dual inflation) has acquired both academic recognition and popularity in practice in the recent years. The results of our empirical estimation do not provide a robust verification of the existence of BS effect in spite of the observed prerequisites and the accompanying economic indicators interrelations. Actually there are several factors that interfere with the BS effect lying in the wage convergence process in both sectors and others that influence productivity developments in the sectors. This prompts that the price movement in the country has other driving motions – above all wage setting and incomplete price liberalization, other factors productivity, imported inflation (pass trough) and inflation generated by the temporary gaps between money demand and money supply.

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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 487.

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Length: 41 pages
Date of creation: 01 Jul 2002
Date of revision:
Handle: RePEc:wdi:papers:2002-487

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Keywords: inflation; currency board; EU accession; Bulgaria;

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References

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Citations

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Cited by:
  1. Federico Ravenna & Giovanni Lombardo, 2009. "Trade and Optimal Monetary Policy," 2009 Meeting Papers 784, Society for Economic Dynamics.
  2. Piritta Sorsa & Dimitar Chobanov, 2004. "Competitiveness in Bulgaria: An Assessment of the Real Effective Exchange Rate," IMF Working Papers 04/37, International Monetary Fund.
  3. Gaetano D’Adamo, 2011. "Wage spillovers across sectors in Eastern Europe," Working Papers 1122, Department of Applied Economics II, Universidad de Valencia.
  4. Egert, Balazs, 2005. "Equilibrium exchange rates in South Eastern Europe, Russia, Ukraine and Turkey: Healthy or (Dutch) diseased?," Economic Systems, Elsevier, vol. 29(2), pages 205-241, June.
  5. federico ravenna & fabio natalucci, 2003. "the road to adopting the euro: monetary policy and exchange rate regimes in EU candidate countries," Computing in Economics and Finance 2003 227, Society for Computational Economics.
  6. Balázs Égert, 2005. "Balassa-Samuelson Meets South Eastern Europe, the CIS and Turkey: A Close Encounter of the Third Kind?," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 2(2), pages 221-243, December.
  7. Dubravko Mihaljek & Marc Klau, 2008. "Catching-up and inflation in transition economies: the Balassa-Samuelson effect revisited," BIS Working Papers 270, Bank for International Settlements.

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