Dual Inflation Under the Currency Board: The Challenges of Bulgarian EU Accession



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).



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