The Political Economy of Bulgaria's Peculiar Post-Communist Business Cycle*

This paper describes Bulgarian macroeconomic performance from early 1991 through early 1997 and provides insights into the macroeconomics of unsatisfactory performance and the political-economy of poor decision-making. There are two leitmotifs: failure to face structural problems and inherited foreign debt; the factors generating Bulgaria's business cycle were interest rate policy and the IMF's varying standoffishness. Bulgaria's macroeconomic poroblems were unusual in that the flawed policy regime involved interest rate policy, and the collapse of the lev in 1996 and 1997 was not preceded by growing current account imbalances. The political economy of the situation was distinctive because the cycle was driven by monetary policy and because of the large role played by international financial institutions. We find a model by Roberto Perotti of shifting coalitions among three interest groups – rich, poor, and middle class segments – in a poor, inegalitarian society relevant for explaining Bulgarian events.