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discussion_200227_en - BULGARIAN NATIONAL BANK Shadowing...

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November 2002 Shadowing the Euro: Bulgaria’s Monetary Policy Five Years on Martin Zaimov Kalin Hristov BULGARIAN NATIONAL BANK dp/2 dp/2 dp/2 7/2002 7/2002 7/2002 7/2002 7/2002 DISCUSSION PAPERS
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2 dp/27/2002 © Bulgarian National Bank, November 2002 ISBN 9 954≠9791≠56≠4 Accepted October 2002. Printed in BNB Printing Center. Views expressed in materials are those of the authors and do not necessarily reflect BNB policy. Send your comments and opinions to: Publications Division Bulgarian National Bank 1, Alexander Battenberg Square 1000 Sofia, Bulgaria Tel.: 9145/1271, 1351, 1906 Fax: (359 2) 980 2425 e-mail: [email protected] Website: www.bnb.bg DISCUSSION PAPERS Editorial Board: Chairman: Garabed Minassian Members: Georgi Petrov Nikolay Nenovsky Victor Yotzov Secretary: Lyudmila Dimova
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3 Discussion Papers Contents I. Introduction .................................................................................... 5 II. The Role of Monetary Policy ........................................................ 5 A Realistic View .......................................................................... 5 The Currency Board .................................................................... 8 III. Coordination of Monetary and Fiscal Policy ............................ 16 Interaction between Monetary and Fiscal Policy ..................... 16 The Currency Board and the Fallacy of Constrained Fiscal Policy .......................................................... 18 IV. The Currency Board, Foreign Trade and the Balance of Payments .................................................................... 23 V. The Economic Activity ................................................................. 31 VI. The Financial Sector .................................................................... 33 VII.Challenges and Recommendations ............................................ 36 References ..................................................................................... 41
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4 dp/27/2002 S UMMARY . B ULGARIA ' S ECONOMIC PROGRESS IN RECENT YEARS IS REGARDED AS DE - TERMINED BY THE CURRENCY BOARD REGIME INTRODUCED IN 1997. B ASED ON EXPE - RIENCE OF THE LAST FIVE YEARS THIS PAPER TRIES TO WEIGH UP THE TRUTH OF THAT ASSUMPTION . I T IS SHOWN THAT CURRENCY BOARD ENSURED THE PRICE AND FINANCIAL STABILITY THE B ULGARIAN ECONOMY NEEDED AS A PRECONDITION FOR STABLE AND SUSTAINABLE ECONOMIC GROWTH . I N THE POST 1997 PERIOD , B ULGARIA ACHIEVED THE LOWEST AND MOST STABLE INFLATION RATES SINCE THE BEGINNING OF THE ECONOMIC REFORM , COMBINED WITH THE HIGHEST AND MOST STABLE OUTPUT GROWTH . T HE FISCAL POLICY WAS ORIENTED TOWARD LOW BUDGET DEFICIT . T HIS POLICY HAD IN PRACTICE AF - FORDED THE GOVERNMENT GREATER FLEXIBILITY BY INCREASING ITS DISPOSABLE IN - COME DUE TO REDUCED INTEREST PAYMENTS AND GROWING TAX BASE AS A RESULT OF HIGH ECONOMIC GROWTH . T HE FIXED EXCHANGE RATE HAD A POSITIVE EFFECT ON THE VOLUME OF FOREIGN TRADE . P ERSISTED CURRENT ACCOUNT DEFICIT , CREATED MAINLY BY IMPORT OF INVESTMENT GOODS , WAS FINANCED BY STABLE INFLOWS OF FOREIGN DI - RECT INVESTMENT . R EFORMED AND MODERNIZED BANKING SYSTEM PROVIDED SOLID GROUND FOR ROBUST ECONOMIC GROWTH . S INCE IN THE CHANGING WORLD NO REFORM PROGRAM CAN BE COMPLETE , THE LAST PART OF THE PAPER EXAMINES THE MEDIUM - TERM CHALLENGES TO B ULGARIAN CUR - RENCY BOARD . * Martin Zaimov is a Deputy Governor of the Bulgarian National Bank (BNB), e-mail: [email protected] Kalin Hristov is a Policy Advisor to the Deputy Governor of the BNB, e-mail: [email protected] This paper was prepared with the invaluable help and support of Boris Petrov, Petar Pandushev, and Maria Karcheva of the Analysis Division to the Treasury Directorate of the BNB. The authors are grateful to Tzvetan Tzalinsky, Ralitza Stoyanova, and Krasimir Germanov, who kindly provided us with data. Krassen Stanchev,
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