DUAL INFLATION UNDER THE CURRENCY BOARD THE CHALLENGES OF BULGARIAN EU ACCESSION

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 BS effect in Bulgaria (after Currency Board introduction). BS explanation of inflation (or dual inflation) has acquired not only academic recognition and popularity in practice as well. Altogether, the results of our empirical estimation do not completely corroborate the existence of this effect but rather they justify its existence as a tendency (as a rate/speed of changes). Actually there are several factors that hinder wage convergence in both sectors and such that alter productivity developments in the sectors. In our opinion, we could speak of BS effect only in terms of rate (dynamic BS) and not in levels (static BS). This prompts us that the price movement in the country has other driving motions – above all imported inflation and inflation generated by the temporary gaps between money demand and supply.