Abstract
Abstract This paper presents an overview of the channels of monetary transmission and their manifestation in Bulgaria – a country in a currency board arrangement – in the first five years after the introduction of the regime. The presence of such a mechanism of transmission requires some form of macroeconomic discretion. The latter is approximated here with dynamics in the single fiscal account present on the balance sheet of the currency board.
Highlights
In early 1997, after negotiations with the IMF, the recently elected government of Bulgaria at the time decided to introduce a currency board regime in the country
Its aim is to investigate how an unorthodox form of monetary policy transmits through its different channels to the real sector of an unorthodox environment
We will use the following structure: the section will discuss possible monetary policy instruments under the currency board and their dependency on fiscal policy in the Bulgarian case; the third section will deal with the different channels of monetary transmission and the Bulgarian specificities that should influence their relative strength; a couple of vector autoregression (VAR) models will follow that empirically test the effects and magnitude of some of those channels; possible implications are left for the conclusion
Summary
In early 1997, after negotiations with the IMF, the recently elected government of Bulgaria at the time decided to introduce a currency board regime in the country. 58 Journal of Central Banking Theory and Practice ditional possible source of growth – active management of monetary policy It is beyond the scope of this paper to investigate the merit behind such fears, especially in light of the numerous statistics and research showing that the currency board was and continues to be a well- functioning and beneficial macroeconomic choice for Bulgaria.[1] The paper, points to certain possibilities of conduct of macroeconomic policy and a resulting monetary transmission mechanism. Its aim is to investigate how an unorthodox form of monetary policy transmits through its different channels to the real sector of an unorthodox environment (a transition country in a currency board reviving from a costly financial crisis and building market institutions at the same time). We will use the following structure: the section will discuss possible monetary policy instruments under the currency board and their dependency on fiscal policy in the Bulgarian case; the third section will deal with the different channels of monetary transmission (having already established its presence) and the Bulgarian specificities that should influence their relative strength; a couple of VAR models will follow that empirically test the effects and magnitude of some of those channels; possible implications are left for the conclusion
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