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



William Davidson Institute Working Paper 487

Figure 8. Price dynamics in the tradable and non-tradable sector
(1997:12 = 1)

Price non-tradables ------Price tradables

Before we attempt to make any conclusion of the existence of the BS effect, let’s
first see what its direct
econometric estimation as stated in equation (1) is. We apply the
econometric technique developed by Halpern and Wyplosz (2001). It might be surprising
but the results of the tests of the BS equation for the period starting with the CB
introduction in Bulgaria (1997:07 - 2001:12) are not very convincing even in terms of
rates (
dynamic BS effect):

(2) log(PNT/PT) = 2.38 - 0.04logQT + 0.20logQNT + MA(1) + MA(2)

(20.5)    (-2.7)       (12.4)         (8.1) (1.4)

R2 = 0.97, R2adj = 0.96, DW = 1.76

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