High inflation episode of 1996–97 and the Bulgarian currency board

Abstract

Why did inflation fall so dramatically after the establishment of a currency board in Bulgaria in 1997? The establishment of the currency board was the response to a very severe financial crisis where inflation reached hyperinflationary levels. After the currency board was introduced, inflation fell even more spectacularly than it had risen with prices rising less than 10% annually during 1998 and 1999. Was this sudden drop in inflation due to a “discipline” effect caused by a reduction in money growth rates or to a “confidence” effect that created lower inflation expectations thus leading to higher money demand? We find strong indirect evidence for a confidence effect but less support for a discipline effect.

Citation

Beck, S., Miller, J.B. and Saad, M.M. (2005), "High inflation episode of 1996–97 and the Bulgarian currency board", International Journal of Development Issues, Vol. 4 No. 2, pp. 95-121. https://doi.org/10.1108/eb045855