Extreme Monetary Regime Change. Evidence from Currency Board Introduction in Bulgaria
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The radical change of the monetary regime (MR) in Bulgaria in mid-1997: (i) provides opportunity for theoretical and empirical analysis of this specific case of institutional change (ii) may serve as a starting point in the search for common ground between institutional and monetary economics, which is often absent in the literature, particularly that on transition (iii) helps build a new approach to the institutional change of the MR from the perspective of economic, political and ideological interests of the main players in the monetary realm. Part II presents definitions of concepts like monetary institution, monetary organization, monetary regime, monetary regime change, monetary system etc. Also presented in this part is a theoretical hypothesis on which our study is built: the MR change is the result of the interaction between different groups of debtors and creditors, driven by their perceived economic, political and ideological interests. Among major motives for the MR change is the desire of economic players to have greater access to resources and to participate in the process of redistribution and embezzlement of public wealth. The MR change aims to formally fix relationships between creditors and debtors by establishing mechanisms for the enforcement of new monetary rules. The basic hypothesis is detailed in a set of theoretical statements: 1) on the asymmetry of the debtor – creditor relation under a change in the MR, seen in turn as a transition from one asymmetric institutional equilibrium to another, 2) on the endogeneity of the MR change where impulses come from result-oriented efforts of individuals and organizations, 3) on the institutional change as an interaction process between organizations diffusing institutional rules (DIR) and those consuming institutional rules ; in the money realm the latter type of agents may be associated both with creditors and debtors. Mixed configurations are possible where part of the creditors enters into a coalition with part of the debtors to establish the MR yielding benefits for the participants in the coalition,4) on the typologization of the MR change: external (DIR are outside the country, as in the case of the currency board, in Bulgaria or the introduction of the Deutsche mark in Montenegro), internal (DIR are internal for the country as for the currency board in Estonia, the Abramovich reform in Yugoslavia), and mixed (the currency board in Lithuania, the dollarization in Ecuador), 5) in most cases the MR change is accompanied by a crisis in the old MR when money loses partially or completely its organizations stop controlling the enforcement of rules and even breach them ; hyperinflation is one of the crisis manifestations and a harbinger of the MR change ; it can be assumed that in order to facilitate the imposition of the new MR, DIR organizations – for example the IMF – are able to provoke such a crisis to some extent or to accelerate it), 6) the interaction between debtors and creditors is polarized in the dynamics of the nominal interest rate (a function of the real interest rate and expected inflation, formed on the basis of different models of behavior) which is the visible side of the conflict, 7) the MR change can be viewed as a transition from one type of systemic budget constraints to another type, from soft to hard and vice versa. Hard budget constraints serve the interests of creditors and soft budget constraints those of debtors. Of course, it should be taken into account that “hard” and “soft” budget constraints are unequally distributed among economic agents. In Part III, the theoretical hypotheses are considered in light of the Bulgarian case. The main players are presented in detail from the point of view of their interests in relation to the MR change – that is the introduction of the Currency Board (CB). The players are detailed: 1) external creditors of Bulgaria (private and official), 2) the IMF which is given special attention due to its role played in imposing the Currency Board, 3) households (net internal creditors), 4) the government (external and internal debtor - special emphasis is placed on the bipolar role of the government expressed in the external/internal debt ratio, 5) the central bank (internal creditor, very often “first” not last resort), 6) state companies (debtors), 7) private companies (net internal creditors), 8) commercial banks and related client companies (net debtors), 9) politicians and bureaucrats (debtors), etc. Employing the basic theoretical hypotheses, the chronology and the facts of the 1996/1997 financial crises and hyperinflation and the introduction of the CB in July 1997 are specified. The interpretation of events differs to a great extent from the traditional mainstream interpretation of the CB introduction as a sole instrument of financial stabilization. In Part IV we attempt to present possible empirical approaches to describe institutional change and mainly to construct some indicators of its dynamics. In our view, indicators should reflect changes in the asymmetric positions of the main players (different types of debtors, creditors and coalitions between them). In the case of the introduction of CB in Bulgaria, are studied: 1) the structure and maturity of external and internal debts before and after the introduction of the CB – quantitative indicators 2) the dynamics of interest rates, inflation and debt securities yield – price indicators 3) the specific design of the CB, the dynamics of foreign currency reserves and the principles of their investment – organizational-structural indicators. The conclusion summarizes the results of the study and provides possible directions for other studies of the monetary regime change in an institutional perspective. An attempt to construct a game model of CB introduction is made in the Annex.