Currency Board Arrangement Research Articles

A Real-Business-Cycle model with energy use: Lessons for Bulgaria (1999-2018)


 
 
 We introduce energy as a productive input into a real-business-cycle model with government sector. We calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2018). We investigate the quantitative importance of the presence of energy, and the potential relevance of energy price shocks as driving forces behind the observed business cycle fluctuations in Bulgaria. In particular, a positive shock to energy prices in the model works like a negative technological shock. Allowing for the presence of energy as a factor of production does not substantially improves the model performance against data, and is thus an unlikely driver of business cycle fluctuations in Bulgaria.
 
 

Post-Pandemic Inflation and Currency Board Arrangements in the Balkans

ABSTRACT Maintaining monetary stability is the first and fundamental objective of the currency board regime, especially after political and economic crises such as the one in the Balkans in the 1990s. The very limited role of the central bank has disciplined financial institutions and governments, but at the same time is not conducive to long-term growth and employment. This policy ties the domestic currency to the ‘peg’ currency, leading to inflationary tendencies in the country whose currency is used as the ‘peg’. Currently, the high inflation rates are caused by the pandemic crisis, but also by the war in Ukraine. This paper analyses the causes of inflation in Bosnia and Herzegovina and Bulgaria as countries with currency boards. The results show that inflation in these two countries is ‘imported inflation’ from two points of view: the monetary policy of the European Central Bank and the inflation trend in the EMU, but mainly due to the Ukraine crisis and consequently the energy and food crisis.

The effect of a currency board arrangement on subjective assessments of a country's economic performance

We present a novel approach to evaluating the effect of a monetary exchange rate regime on economic performance, focusing on countries with a currency board arrangement (CBA). This approach is designed to evaluate the impact of the regime on the perceptions and expectations of a population. We utilise seemingly unrelated regressions to analyse data from large-sample surveys conducted by the Austrian National Bank over the period 2007-2016 in ten European transition economies. The analysis indicates that the probability of the economic situation in a country being perceived as good by its citizens is lower in countries with a currency board arrangement. However, this negative effect almost disappears among respondents who do not trust their government and when there is a significant recession in the country. These findings suggest that a CBA should be maintained for its stabilising effects: 1) when the economic situation is unfavourable, although it might not be beneficial once the situation is stabilised; 2) in countries with low levels of trust in government.

A Progressive Consumption Tax: An Important Instrument for Stabilizing Business Cycles, or Just an Exotic Idea?

ABSTRACT We introduce progressive consumption taxation into a real-business-cycle setup augmented with a detailed government sector. We calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999–2016). We investigate the quantitative importance of the presence of progressive taxation of consumption expenditures for the stabilization of cyclical fluctuations in Bulgaria. We find the quantitative effect of such a tax to be very small, and thus not important for either business cycle stabilization or public finance issues.

LEGAL REGIME OF CURRENCY BOARD ARRANGEMENT

A Currency Board Arrangement (CBA) is a distinct set of rules designed for conducting monetary policy by central banks. Bulgaria has implemented it since 1997. The crucial part of the CBA legal regime is the subjective right of every owner of Bulgarian legal tender – leva to convert them into Euros, which is the reserve currency according to the Bulgarian National Bank Act. The central bank in Bulgaria, the Bulgarian National Bank (BNB), should sell Euro to every owner of Bulgarian money without any restrictions. This legal convertibility right is supported by the requirements for foreign exchange reserves managed by the BNB.

A Real-Business-Cycle Model with Financial Liberalization: Lessons for Bulgaria (1999-2020)


 
 
 Financial openness is introduced into a real-business-cycle setup aug- mented with a detailed government sector. The model is calibrated to Bulgarian data for the period following the introduction of the currency board arrangement (1999- 2020). The quantitative importance of financial openness is investigated for the stabi- lization of cyclical fluctuations in Bulgaria. The computational experiment performed in this paper reveals that greater financial openness increases the impact of technology shocks on output, investment, consumption, labor hours, and net exports. This am- plification effect is due to the following mechanism: openness provides a cheap access to foreign funds. Unfortunately, the new results come at odds with a major empirical observation, i.e. that consumption and net exports strongly pro-cyclical; the model, however, produces a countercyclical consumption, as well as net exports. Thus, such a setup is not yet ready to be used for policy analysis.
 
 

A Real-Business-Cycle model with robots: Lessons for Bulgaria


 
 
 Robots are introduced into a real-business-cycle setup augmented with a detailed government sector. Robots are modeled as an imperfect substitute for labor services. The model is calibrated to Bulgarian data for the period following the intro- duction of the currency board arrangement (1999-2020). The quantitative importance of the presence of robots in the economy is investigated for business cycle fluctuations in Bulgaria. In the presence of robots, wages increase, but employment falls after a technology shock. However, for plausible parameter values, the effect is predicted to be quite small.
 
 

A real-business-cycle model with human capital accumulation: lessons for Bulgaria (1999-2018)

ABSTRACT We introduce human capital accumulation into a real-business-cycle setup. We calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999–2018). We investigate the quantitative importance of the presence of skill acquisition for cyclical fluctuations in Bulgaria. After subjecting the smodel to a battery of tests, we find the quantitative effect of such a channel – aside from producing a moderate increase in the variability of hours – to be relatively small. In other words, government spending on education turns out to be an ineffective instrument when it comes to smoothing the cycle.

Specificities of the Monetary Transmission Mechanism within the Bulgarian Currency Board Framework: The first five years

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.

Bulgaria’S Macroeconomic Policy on the Verge of the Twenty-Fifth Anniversary of the Currency Board Arrangement

Bulgaria’S Macroeconomic Policy on the Verge of the Twenty-Fifth Anniversary of the Currency Board Arrangement

The role of endogenous capital depreciation rate for business cycle dynamics: lessons from Bulgaria (1999-2018)


 
 
 We allow for an endogenous depreciation rate of physical capital stock into a real-business-cycle model with a government sector. We calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2018). We investigate the quantitative importance of the endogenous depreciation rate, and indirectly, the capital utilization mechanism for cyclical fluctuations in Bulgaria. Allowing for endogenous variations in the depreciation rate of capital improves the model performance against data, and in addition this extended setup dominates the standard RBC model framework with constant depreciation and a fixed utilization rate of physical capital, and a fixed depreciation rate e.g., Vasilev (2009).
 
 

Balance of Payments Deficit and Currency Board Arrangement Sustainability in Bosnia and Herzegovina

Abstract Constant current account deficit in Bosnia and Herzegovina results from a large foreign trade imbalance, which in turn is a consequence of uncompetitiveness of the economy in the global market. The current account deficit is mainly financed by foreign remittances, foreign aid, and least of all by foreign investment. Lately, the outflow of the active, working population has been decreasing the labor force (especially the qualified and highly educated employees), as well as the domestic demand, which will exert further pressure on the balance of payments account. On the other hand, monetary policy is operating under the principles of currency board, i.e. applying a firm exchange rate, so the question arises whether and to what extent it is sustainable, under the conditions of a high current account deficit. The purpose of this paper is precisely to examine the relation between the deficit of balance of payments and the sustainability of the currency board arrangement in Bosnia and Herzegovina, under such conditions.

BULGARIA'S REAL CONVERGENCE IN THE CONTEXT OF POTENTIAL EMU MEMBERSHIP

Since the entry of Bulgaria into the European Union, the country's full membership in the Economic and Monetary Union has become one of the national economic policy goals. In the recent period Bulgaria fulfils all the nominal convergence criteria, except for the criterion on exchange rate stability as long as the country does not participate in the ERM II mechanism (although Bulgaria has a currency board arrangement in place since 1997 and the Bulgarian currency is pegged to the euro). Despite that, Bulgaria remains the EU member with the lowest level of GDP per capita and lowest productivity and income levels. In June 2018 the Bulgarian authorities submitted a letter of intent to the EU policy makers to join the ERM II mechanism and the banking union. In July 2020 the mutual agreement to include the Bulgarian lev in the ERM II mechanism and Bulgaria to join the banking union was achieved. In the context of the future full EMU membership it is important to assess the evolution and the state of Bulgaria's real convergence. This paper looks at the Bulgaria's real convergence, understood as the convergence of GDP per capita, labour productivity and convergence of price levels. We use the Beta and Sigma convergence methods and explore the convergence in the 1999-2018 period. We also compare Bulgaria's real convergence to the real convergence of other CEE countries that are EU members (Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia), part of which have already accepted the euro and the other part are still outside of the euroarea. We also try to explain the economic reasoning behind the EMU accession path of Bulgaria. The results of the survey show that Bulgaria lags behind in its convergence process from other CEE countries, but at the same time we believe that the benefits of the euroarea membership outweigh the possible negative consequences.

An RBC model with non-Ricardian households: lessons for Bulgaria (1999–2018)

PurposeThe authors introduce non-Ricardian (“hand-to-mouth”) myopic agents into an otherwise standard real-business-cycle (RBC) setup augmented with a detailed government sector. The authors investigate the quantitative importance of the presence of nonoptimizing households for cyclical fluctuations in Bulgaria.Design/methodology/approachThe authors calibrate the RBC model to Bulgarian data for the period following the introduction of the currency board arrangement (1999–2018).FindingsThe authors find that the inclusion of such non-Ricardian households improves model performance along several dimensions and generally provides a better match vis-a-vis data, as compared to the standard model populated with Ricardian agents only.Originality/valueThis is a novel finding in the macroeconomic studies on Bulgaria using modern quantitative methods.

Дискреция или автоматичен механизъм определя монетарните условия в България?

The goal of this research is to find out what determines monetary conditions in Bulgaria under a currency board arrangement – the automatic adjustment mechanism of the orthodox currency boards or discretionary policies of the government and the central bank. A time series vector autoregression for the period 1998-2018 is employed in order to investigate the impact of the fiscal reserve and the minimum required reserves of the commercial banks on the monetary base, the interbank interest rate, the money supply and the inflation rate. The empirical results indicate that the automatic adjustment mechanism does not function under the Bulgarian currency board but the policies of the government and the central bank have a discretionary effect on monetary conditions in the country.

A Real-business-cycle Model with a Stochastic Capital Share: Lessons for Bulgaria (1999–2018)

We allow for a stochastic capital share into a real-business-cycle setup with a government sector. We calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999–2018). We investigate the quantitative importance of the variability in capital share for cyclical fluctuations in Bulgaria. In particular, allowing for a stochastic capital share in the model increases variability of investment and employment, at the cost of decreasing the volatility of wages, and causing employment to become countercyclical. JEL Classification: E24, E32

The effect of a currency board arrangement on subjective assessments of a countrys economic performance

The effect of a currency board arrangement on subjective assessments of a countrys economic performance

How Fiscal Policy in Bulgaria may Affect the Transition to a Low Carbon Economy?

The adaptation of traditional macroeconomic policy goals to new ecological realities assigns a specific role to macroeconomic policy. We model the short-run transmission mechanism of fiscal policy under Currency Board Arrangements in Bulgaria in order to assess the fiscal policy potential to boost sustainable economic development and compensate for the economic growth losses due to decarbonisation of the economy. We find that fiscal policy instruments in Bulgaria have no statistically significant effect on GDP components considered separately but they do have a complex effect on macroeconomic environment in the country. This indicates that specific fiscal policy effects to support the transition to a low-carbon economy in Bulgaria cannot be expected and the structural policies should be followed.

The Fiscal Policy of Bulgaria from the Standpoints of the Business Cycle and the Twin Deficits Hypothesis

Macroeconomic management of a small open economy in a currency board arrangement faces two serious problems: first, under a fixed exchange rate, fiscal policy is the only effective macroeconomic instrument for smoothing out the business cycle; second, the twin deficits phenomenon, if it exists, may jeopardize the stability of the currency board arrangement. This paper uses quarterly seasonally adjusted Eurostat data for the period of 1999–2019, the Hodrick–Prescott filter and a vector autoregression (VAR) to answer the three questions that are of utmost importance to Bulgarian policy-makers: first, is the discretionary fiscal policy of the Bulgarian government procyclical or countercyclical? Second, do the automatic stabilizers in the Bulgarian state budget function properly? Finally, is the twin deficits hypothesis valid for Bulgaria? Our findings imply that the fiscal discretion of the Bulgarian government is procyclical, while the automatic fiscal stabilizers do not work effectively. The first part of the twin deficits hypothesis (the causal link between the fiscal balance and the current account balance) is confirmed but the second part of the twin deficits hypothesis (the positive relationship between the fiscal balance and the current account balance) is rejected for Bulgaria. It may be inferred that both sides of the Bulgarian state budget (revenue and expenditure) need to be improved in order to increase the effectiveness of Bulgaria’s fiscal policy. Low budget deficits (not higher than 3% of GDP) are recommended for improving the current account balance and encouraging economic growth.

The Influence of Taxes on Inflows and Outflows of Foreign Direct Investment

Macroeconomic management of a small open economy in a currency board arrangement faces two serious problems: first, under a fixed exchange rate, fiscal policy is the only effective macroeconomic instrument for smoothing out the business cycle; second, the twin deficits phenomenon, if it exists, may jeopardize the stability of the currency board arrangement. This paper uses quarterly seasonally adjusted Eurostat data for the period of 1999–2019, the Hodrick–Prescott filter and a vector autoregression (VAR) to answer the three questions that are of utmost importance to Bulgarian policy-makers: first, is the discretionary fiscal policy of the Bulgarian government procyclical or countercyclical? Second, do the automatic stabilizers in the Bulgarian state budget function properly? Finally, is the twin deficits hypothesis valid for Bulgaria? Our findings imply that the fiscal discretion of the Bulgarian government is procyclical, while the automatic fiscal stabilizers do not work effectively. The first part of the twin deficits hypothesis (the causal link between the fiscal balance and the current account balance) is confirmed but the second part of the twin deficits hypothesis (the positive relationship between the fiscal balance and the current account balance) is rejected for Bulgaria. It may be inferred that both sides of the Bulgarian state budget (revenue and expenditure) need to be improved in order to increase the effectiveness of Bulgaria’s fiscal policy. Low budget deficits (not higher than 3% of GDP) are recommended for improving the current account balance and encouraging economic growth.