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

William Davidson Institute Working Paper 487

Index of Consumer Prices, HICP), not the three EU members with the
lowest inflation rate.

(iv) The more radical proposition is to abolish completely the nominal criteria,
which will complicate the transition countries real convergence to the euro
zone.

Since the dual inflation cannot entirely determine the inflation behavior under the
CB arrangements, it is reasonable to look for another sources of price increases - above
all imported inflation (balance of payments driven inflation) and such caused by the
temporary gap between money supply and demand (output gap driven inflation). For
these purposes we have developed a synthetic model, which combines the three pointed
causes of inflation in Bulgaria under the CB monetary regime, Nenovsky and al., 2000
(see. Annex 1). This model needs to be improved and empirically checked in the future.

Another axis of future research would be to develop and to estimate the BS effect
in a model of inflation involving price, wage and productivity dynamics in Bulgaria and
the EU. Such exercise however demands for high compatibility of the definition methods
and of the structure of the available variables.

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