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



William Davidson Institute Working Paper 487

improvement is evidenced after the introduction of the CB (see. Annex 3)14. The overall
rigidity of real salaries leads to an increase of inflation by hindering the BS effect (which
will be discussed later in the paper). The strong BS effect is limited by the fact that real
wage rigidity is higher in the tradable sector (industry) than in the non-tradable sector
(represented by services).

In general, the above-mentioned real factors have their effect on relative prices
between the countries participating in a monetary union, and may generate long-lasting
inflation differentials. As illustrated in figure 2, there is a considerable gap in the degree
of economic development and price levels between the group of countries applying for
EU (and later on for EMU membership) and the EU and further difference is obvious
among the candidate countries themselves. The real convergence of the candidate

14 The assessment is taken from the research of Nenovsky and Koleva (2001).



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