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

William Davidson Institute Working Paper 487

the Bulgarian lev is experiencing some moderate real appreciation²⁸, which seems to be
somehow kept in limits (see Figure 11).

Figure. 11. Real effective exchange rate appreciation index

In fact Bulgarian monetary authorities do not have much room for maneuver in
order to alleviate the effect of the real exchange rate appreciation. Taking into
consideration the possible unfavorable consequences to expectations and economic
behavior of an eventual exchange rate regime shift, the potential for exchange rate
overshooting and the existence of price and wage rigidity, Bulgaria has no choice of
strategies but keeping stable nominal exchange rate with somewhat higher inflation²⁹.

On the side of the real economy, new efforts should be put in completing
privatization and price liberalization. Further steps, typical for the catching-up process
should be taken in respect to wage setting and making the labor market more flexible,
establishing productivity-enhancing domestic and foreign investment, and efficient credit

²⁸ The Real Effective Exchange Rate Index is calculated as a basket of the three currencies with the
largest share in the trade turnover: USD - 57.24%, DEM - 41.98%, CHF - 0.71%. Consumer prices
are used as a measure to deflate the nominal exchange rates.

²⁹ For the range of issues under discussion before the monetary authorities of the accession countries
undertake some strategy to cope with real appreciation see Backe and al., 2002.

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