William Davidson Institute Working Paper 487
countries to the euro area members is expressed in a gradual elimination of these
differences even after becoming a part of the EU (and EMU)15. With the increasing
degree of integration into the EU, the applicant countries will catch up with the EU
income levels. This is a long-term process, which will determine specific inflation
differentials given the level of national income and its growth rates of each accession
country (see. table 1 and table.2)16.
|
Table 1. Inflation Differential (BG-EU15) | |||||
|
1995 |
1996 1997 1998 1999 |
2000 |
2001 | ||
|
annual average percentage change in inflation rate | |||||
|
EU-15 |
2.8 |
2.4 1.7 1.3 1.2 |
2.1 |
2.4 | |
|
BG |
69.1 |
116.6 1268.0 46.3 0.4 |
10.1 |
7.5 | |
|
Inflation | |||||
|
Differential |
66.3 |
114.2 1266.3 45.0 -0.8 |
8.0 |
5.1 | |
|
Source: |
WIIW. | ||||
|
Table 2. Real growth rate of GDP (%) | |||||
|
1996 |
1997 1998 1999 |
2000 |
2001 | ||
|
Eu-15 |
1.6 |
2.5 2.9 2.6 |
3.3 |
1.5 | |
|
Bulgaria |
-10.1 |
-7 3.5 2.4 |
5.8 |
4.0 | |
|
Growth |
-11.7 |
-9.5 0.6 -0.2 |
2.5 |
2.5 | |
|
Differential | |||||
|
Source: |
WIIW. | ||||
In the following section we will concentrate on the BS effect, which is
conventional and one of the widely accepted explanations of inflation processes in the
accession countries.
15 The catching-up process is still on the agenda of EU (and particularly of EMU) member countries
which experience different inflation rates due to price level convergence (see. ECB, 1999).
16 For a detailed presentation of real convergence mechanisms see also Barro and Sala-i-Martin
(1992), Kim (1997), Razin and Yuen (1995).