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The paper was prepared during Mr. Chobanov’s summer internship in the IMF’s Sofia office. We are grateful for Mark de Broeck, Ana Corbacho, Christopher Duenwald, Kalin Hristov, and Bozhil Kostov for their comments, and to Desislava Jeleva for technical assistance.
Clark and MacDonald (1998) The behavioral models usually identify group of exogenous variables, which determine the internal and external balance. The reduced form connects the real exchange rate with these determinants. Thus, there is no need to search for the sustainable levels of the current account and the external position, as they are endogenous to the system.
The CBA was imposed through a special law, and a change in the fixed exchange rate is only possible if this law is amended by parliament. This legal framework does not allow the monetary authorities to devalue the exchange rate of the lev in order to have competitiveness gains. The main principles of the CBA in Bulgaria are: independence of the BNB from the government; proscription of any direct lending to the government; and clear and transparent mechanisms for the function of the lender of last resort.
Source: Bulgarian National Bank.
Germany’s PPI data are from the Deutsche Bundesbank website, Italy’s PPI from the Bank of Italy’s Economic Bulletin, and Greece’s PPI from the Bulletin of Conjunctional Indicators of Bank of Greece. For Russia the data are from Bloomberg.
National Statistics Institute Data.
They explain the absence of the B-S effect by lack of wage equalization between the traded and non-traded goods sectors in Bulgaria.
Data are taken from Bloomberg.
The t-values are given in brackets.
The misalignment is estimated as follows: Misalignment = (RERact − REReq)/REReq*100. Positive values of the misalignment mean that the actual RER exceeds the estimated equilibrium level, so the RER is overvalued.
MacDonald (1997) calibrates the sustainable values of the fundamental factors by means of the Hodrick-Prescott filter.
When real output reaches its potential level, inflation reaches its expected level and the real exchange rate clears the goods and services market.
Changes in the propensity to save, productivity, the terms of trade and foreign real interest rates.