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

William Davidson Institute Working Paper 487

Chart 1. Model of Inflation - dynamic BS affect

The stance of pre-accession economies is characterized by a number of features,
which cause many problems not only in the BS effect estimation but in its clear detection
as well. Various factors have different impact on the BS effect, making it either stronger
or weaker. Let’s point out some of them¹⁹.

First of all, the time of centrally planned economy is distinguished for the
repression and low productivity in the services sector. The labor in the sector was not
regarded as productive one²⁰ and it was not included in the produced national income
(concept used in the socialist accounting instead of GDP). As a consequence of the
recovering of the sector during the transition, high productivity rates are evident while
the BS effect implies that productivity of the services sector does not exceed the
productivity of industries (Busson and Villa, 1996). As a whole, this transition specificity
reflects into a weaker BS effect.

¹⁹ See for example Aglietta and al. (1998), Frensch (2001), Cheung and Lai, (2000), Brada and
Kutan (2001).

²⁰ The definitions of productive and non-productive labor were typical for the centrally planned
economy and used in Marxist terminology.

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