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

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Author Info
Nikolay Nenovsky ()
Kalina Dimitrova ()

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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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Paper provided by William Davidson Institute at the University of Michigan Stephen M. Ross Business School 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
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Handle: RePEc:wdi:papers:2002-487

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

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Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
F15 - International Economics - - Trade - - - Economic Integration

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Balázs Égert, 2005. "Equilibrium Exchange Rates in Southeastern Europe, Russia, Ukraine and Turkey: Healthy or (Dutch) Diseased?," William Davidson Institute Working Papers Series wp770, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
    Other versions:
  2. 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. [Downloadable!]
    Other versions:
  3. Dimitar Chobanov & Piritta Sorsa, 2004. "Competitiveness in Bulgaria: An Assessment of the Real Effective Exchange Rate," IMF Working Papers 04/37, International Monetary Fund. [Downloadable!]
  4. Fabio M. Natalucci & Federico Ravenna, 2002. "The road to adopting the euro: monetary policy and exchange rate regimes in EU candidate countries," International Finance Discussion Papers 741, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  5. 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. [Downloadable!]
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