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

William Davidson Institute Working Paper 487

Table 3. Labor productivity growth rates (annual change, %)

Sources: WIIW, Eurostat.

If considered from the dynamic point of view, the BS effect means that countries
featuring higher growth rates will have higher inflation rates (dynamic BS)¹⁸, see figure. 3
and table 3. This is accounted for by the fact that the production capacity in the tradable
sector of the developing countries grows relatively faster than the one in the non-tradable
sector, while salaries in both sectors tend to get equal. Thus, the growth rates of the
general price level in the developing countries are higher than in the developed ones.
Taking into consideration the fact that production capacity level in Bulgaria is much
lower than the one in the EU countries and that rates of production capacity in Bulgaria
are increasing, it is normal for the general price level to grow considerably faster than in
the EU. The dynamic BS effect is illustrated in the following chart.

¹⁸ Concerning the difference between the static and dynamic form of the BS effect, see Busson and
Villa (1996).

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