William Davidson Institute Working Paper 487
with the disequilibria of the non-tradable goods market (Hossain and Chowdhury, 1998
and Nenovsky and al., 2000).
The irrevocable pegging of the exchange rate upon the introduction of the CB
eliminates in principle any purposeful independent monetary policy and results in the
creation of an asymmetric monetary union8 between the country practicing the CB and
the country which currency is used for reserve currency. What is typical for the CBs
established in the 90-ies is that they preserve some monetary policy instruments of the
traditional central bank (Nenovsky and Hristov, 2002). These peculiarities in the design
of the Bulgarian CB allow for some short periods the monetary conditions in the country
to deviate from the ones in the euro area in spite of the common monetary policy. For
instance, the Bulgarian National Bank took a decision to decrease the minimum required
reserves in July 2000 from 11% to 8% in a period when the ECB (the institution setting
externally our monetary policy) was pursuing a steady policy of increasing interest rates9.
Another example for the impact on liquidity in the economy is the forthcoming
introduction of the RTGS (in the second half of 2002) that could be interpreted as a
technological innovation in money supply dynamics.
These periods of deviation of monetary conditions in the country from the ones in
the euro area may not be long-lasting due to the existing mechanism of automatic
convergence. The speed of neutralization of these differences is determined by the degree
of integration of the Bulgarian banking system in the European one. In the case
mentioned above, the Bulgarian commercial banks increased their foreign assets by
restructuring their portfolios and to a great extent neutralized the differences between the
8 The asymmetric nature of such a monetary union is expressed in the fact that the two countries have a
common monetary policy in which decisions are made unilaterally by the country(s) whose currency is
used as a reserve currency. Commercial banks in the country practicing the CB have no access to
refinancing by the central bank pursuing the common monetary policy. This peculiarity influences the
monetary policy transmission mechanism. The existence of this feature is to a great extent determined by
the structure of the banking system of the country under the CB arrangement. The more integrated the
national banking system of the CB country is in the financial system of the monetary union, the weaker the
impact on the transmission mechanisms is. Usually the banking systems of countries practicing the CB are
dominated by foreign banks, which have access to refinancing by the central bank conducting the common
monetary policy.
9 For the period from November 1999 to October 2000, the European Central Bank has increased
interest rates by 225 basis points.