bispap17f - Shadowing the euro: Bulgarias monetary policy...

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BIS Papers No 17 61 Shadowing the euro: Bulgaria’s monetary policy five years on Kalin Hristov and Martin Zaimov 1 1. Introduction Bulgaria’s economic progress in recent years is regarded as determined by the currency board regime introduced in 1997. It seems appropriate, five years on, to weigh up that assumption. The graphs and analysis which follow support our generally positive view of the then government's decision to accept the IMF’s advice on how to manage its monetary policy. But we are well aware that the currency board, now as then, has not been without critics; this report examines the medium-term challenges to a policy of shadowing the Deutsche mark's successor, the euro. The paper is structured as follows: Section 2 describes the Bulgarian National Bank’s (BNB) monetary policy over the past five years, and summarises the results. Section 3 analyses the link between monetary and fiscal policy by outlining changes in the latter after the launch of the currency board, and its increased effectiveness. Section 4 shows the link between the currency board, foreign trade and the balance of payments, highlighting the conditions for balance of payments sustainability with a fixed exchange rate. Section 5 looks at changes in the economy and the banking system in the last five years. Section 6 concludes with some of the medium term challenges facing the currency board. 2. The role of monetary policy A realistic view The decade of transition from a centrally planned to a market economy in central and eastern Europe and the former Soviet Union coincided with a change in accepted views on economic policy. The role of central banks, and of monetary policy, in national economic development was seen in a new light. Macroeconomic policy during the 1990s changed significantly, both in theory and in practice. A consensus emerged that the basic goal was to ensure a nominal anchor for controlling inflation and inflationary expectations, in order to support overall economic stability and to create a favourable environment for sustainable long-term growth and wealth creation. 2 It follows that the broad thrust of monetary policy must, at least to some degree, coincide with overall economic policy. It was long believed that central banks’ monetary policy could influence long-term trends in employment, output and inflation. In other words, the monetary authorities could control both nominal and real variables, thus achieving more than one goal. But both theory and empirical evidence show that pursuing several goals at once, some at odds with each other, does not work. A better approach is to limit monetary policy to achieving price stability within various institutional frameworks. 1
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bispap17f - Shadowing the euro: Bulgarias monetary policy...

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