Mundel Optimality of the Bulgarian Accession to the Euro Area

Abstract

This paper analyses the level of economic convergence within the EU and in particular within EMU. The main purpose is to assess the level of business cycles synchronisation between Bulgaria and the Eurozone. The research is conducted with data for the period 1995–2019 divided in different subsamples in an attempt to find important turning points in the synchronicity levels. Business cycles are identified through detrending of GDP time series with two alternative techniques – Baxter-King and Hodrick-Prescott filters. The empirical results of this paper reveal that in the period 1995–2002 Bulgaria did not form Optimum Currency Area with any of the EMU members and possibly suffered severe negative effects from the introduction of the Currency Board in 1997. The findings also identify substantial increase in the synchronisation between Bulgaria and the EMU members, and within the Eurozone itself in the first decade of XXI century, followed by deterioration, signalling for potential problems with the stability of the Common currency in the future.