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



William Davidson Institute Working Paper 487

channels, and last but not least, developing and implementing new technological
innovation.

Regardless of the empirical estimations that do not prove the BS effect existence
in Bulgaria and other research works that emphasize its insignificance (clearly observed
in some countries than in others), a general strategy should be outlined in case this effect
gets stronger in future.
Finally, as most of the accession countries (especially these with
CB) face the threat of high real exchange rate appreciation that will hinder the economic
growth and convergence process, appropriate adjustment of the Maastricht criteria have
been recently suggested. One of the Maastricht criteria is that one year prior to joining
the EMU, the accession country’s rate of inflation should not exceed by more than 1.5
percentage point the average rate of inflation in those three EU countries where inflation
is the lowest. Some proposals are argued by Szapary (2001), who argues that the
following changes of the criteria should be taken into consideration regardless of the fact
that some of them are more easily carried out than the others:

(i) From a strictly conceptual point of view, the first order solution would be
to link the permissible inflation deviation to the size of the productivity
growth differential, since it is the differential which determines the BS
effect. However, to find a standard measurement of the BS effect, which
can be uniformly applied for defining the permissible inflation deviation
seems unfeasible due to economic, statistical and political reasons.

(ii) Another solution is to group both the member countries and the accession
countries on a per capita income basis and to define different price
convergence criteria for each of them - the lowest per capita incomes
countries should meet higher inflation requirements. This proposition is
less likely than the first one because the principle of equal treatment
involved in the initial criteria for joining the EMU would be broken and
the negotiations paralyzed.

(iii) A reasonable compromise would be to define the Maastricht criteria in
reference to the average inflation rate of the euro zone (the Harmonized

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