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

William Davidson Institute Working Paper 487

( λ^              1

=αо +α_{1 }}logQT- logQNT I + d_t,
к ^λT                   J t

where PNT and PT are the prices in the non-tradable and tradable sector
respectively, QNT and QT are the corresponding productivity in the sectors, λNT and λT
are the share of labor, in respectively, the non-tradable and tradable sector, and d is a
vector of different demand factors like income, government expenditures and etc. If BS
effect exists, the regression coefficient in front of QT should be positive, i.e. it should

( PNT 1

exert much influence on the values of I-----I, and the coefficient in front of QNT -

к PT J

considered as an internal real exchange rate, an increase in the tradable sector
productivity brings real appreciation of the exchange rate. On the contrary, an increase in
the non-tradable sector productivity leads to real depreciation of the exchange rate. From
equation (1) it is expected that the productivity of the tradable sector should have a
“stronger” sign in the econometric estimation because non-tradable sector is more labor
intensive which is in compliance with the contribution made by Paul Samuelson
λ

(-NT->1). In the limits of equation (1), α∣ parameter can be tested as the econometric
λ_T

λ

estimation of the coefficient in front of log QT is divided by the ratio ( -NT- ).
λT

III. Econometric results of the BS effect estimation. Interpretation.

1. Data description

The econometric estimation is conducted on the basis of monthly data in the
period between July 1997 (the introduction of the CB) and December 2001, i.e. 54

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