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.

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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