Measuring the Business Cycle in Bulgaria

The aim of this paper is to estimate the phases of the business cycle in Bulgaria and its degree of synchronisation with the business cycle in the euro area. Applying a structural unobserved components model, consisting of an IS curve, Phillips curve, Okun’s law and a monetary policy response function, consistent with the functioning currency board arrangement in Bulgaria, we find that in the period 1999-2004 the Bulgarian economy was operating below its optimal production capacity. The peak of the economic cycle was reached in the middle of 2008, followed by a period of a decline, corresponding to the period of the global financial and economic crisis and a second downturn corresponding to the period of the European debt crisis. Since mid-2016, the Bulgarian economy has operated above potential and this phase continues up to Q3 2019. Another conclusion of our study is that the business cycle in Bulgaria is to a large extent synchronised with the business cycle in the euro area, with the degree of synchronisation increasing after the accession of Bulgaria to the European Union.