Price and Output Dynamics under a Currency Board: The Case of Bulgaria

Bulgaria differs from the other transition economies considered in this book is that it has experienced the greatest exchange rate regime shift: from the most flexible, floating exchange rate system to the most rigid type of fixed-rate system — a currency board. From the start of the reform period in February 1991, when prices covering more than 70 per cent of retail turnover were liberalized and when administered prices increased fourfold, with the elimination of most subsidies, Bulgaria adopted a floating exchange rate regime. The exchange rate, however, quickly depreciated by 400 per cent, which fuelled inflation. In 1994 inflation was running at 96 per cent per annum and by 1996 had reached 122 per cent. With the advent of continued hyperinflation which exceeded 1000 per cent in 1997 and sharply falling levels of real output — about 7 per cent in 1997, following a 6 per cent fall in 1996 — the floating-rate system was replaced with a currency board regime on 1 July 1997. The Bulgarian currency board fixed the leva to 1000DM. This conveniently divides the period 1991–99 into two distinct sub-periods — the floating-rate period prior to July 1997, and the rigidly fixed exchange rate regime post-July 1997.