Inflation under a Currency Board: The Bulgarian Experience

Ivan Todorov – South-West University “Neofit Rilski”, Faculty of Economics, 66 Ivan Mihaylov Str., Blagoevgrad 2700, Bulgaria

Tsvetomir Tsvetkov – Sofia University “St. Kliment Ohridski”, Faculty of Philosophy, bul. “Tsar Osvoboditel” 15, 1504, Sofia, Bulgaria

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.

7th International Scientific Conference – EMAN 2023 – Economics and Management: How to Cope With Disrupted Times, Ljubljana, Slovenia, March 23, 2023, CONFERENCE PROCEEDINGS, published by: Association of Economists and Managers of the Balkans, Belgrade, Serbia; ISBN 978-86-80194-69-1, ISSN 2683-4510, DOI: https://doi.org/10.31410/EMAN.2023

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