Inflation under a Currency Board: The Bulgarian Experience
Inflation under a Currency Board: The Bulgarian Experience

Author(s): Ivan Todorov, Tsvetomir Tsvetkov
Subject(s): Social Sciences, Economy
Published by: Udruženje ekonomista i menadžera Balkana
Keywords: Bulgaria; Currency board; Inflation
Summary/Abstract: The objective of this paper is to study inflation in Bulgaria under a currency board. The theoretical fundamentals of inflation are systematized. The empirical investigations on inflation in Bulgaria under a currency board are reviewed. The determinants of inflation in Bulgaria under a currency board are identified. A vector autoregression model is specified to forecast inflation and analyze the efficiency of two macroeconomic instruments (the government’s fiscal reserve and the central bank’s minimum reserve requirements) in managing inflation. The empirical results imply that Bulgaria’s inflation is influenced by its past values and the previous values of oil prices, the Euro area’s inflation and the Bulgarian central bank’s minimum reserve requirements. The only macroeconomic instrument Bulgarian policymakers can use to impact on inflation are the minimum required reserves of commercial banks. Since the minimum reserve requirements lack the dosed effect, the reversibility and the flexibility of other monetary tools, their use is recommended in heavy crises only and when no other options are available.

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