Currency Board: the Case of Bulgaria

ISSN 0825-5822 The texts published in the series "Cahiers du CETAI" are solely the responsibility of their authors.

Cahier de recherche
THE NONORTHODOX CURRENCY BOARDS: THE CASE OF BULGARIA
Nikolay NENOVSKY* and Kalin HRISTOV*
2001-01 January 2001

*

Bulgarian National Bank, Research Department; University of National and World Economy, Department of Finance, Sofia, Bulgaria.

Copyright © 2001. Centre d’études en administration internationale (CETAI), École des Hautes Études commerciales (HEC-Montréal). Reproduction of this paper is forbidden without the author 's written authorization. École des Hautes Études Commerciales benefits from a subvention granted by the Fonds pour la Formation de Chercheurs et l 'Aide à la Recherche (FCAR) for the publication of its research papers.

ISSN 0825-5822 Legal deposit – 1st quarter 2001 National Library of Canada Bibliothèque nationale du Québec

THE NONORTHODOX CURRENCY BOARDS: THE CASE OF BULGARIA

Abstract

In recent years a number of countries have introduced currency boards (CB). The new generation currency boards, which is gaining swing and popularity, preserves to different degrees the central bank 's ability to perform the lender of last resort function (LOLR) and leaves room for intervention in case of systemic risk. Central bank flexibility was preserved in different forms in HongKong, Argentina, Estonia, Lithuania and Bulgaria. Macroeconomic and microeconomic implications of such departures from orthodox currency boards have not been thoroughly studied yet. In actual fact, construction of second generation currency boards (often called quasi CB) provides an opportunity for conducting monetary policy (certainly not in its typical form). The major questions that need answers are: (1) which are the new channels of monetary policy; (2) does an orthodox self-regulating mechanism work with second generation currency boards; (3) how are disequilibria in the economy adjusted? The theoretical

Bibliography: ALMUINA, S. "Location of Government Deposits: Implications for Monetary Operations", IMF MAE Operational Paper, MAE OP/99/2, 1999. BAGEHOT, W. What a Panic is and How it Might be Mitigated, The Economist, XXIV, 12 May 1966, 554-555, in M. Collins (ed.), Central Banking in History, Cambridge, The Economist, Vol. I, 1966, p. 236-237 BANCO CENTRAL DE LA REPUBLICA ARGENTINA. Main Features of the Regulatory Framework of the Argentine Financial System, April 2000. BULGARIAN NATIONAL BANK. Banking Laws and Regulations, Sofia, 1999. BENNETT, A. "The Operation of the Estonian Currency Board", IMF Staff Papers, Vol. 40, No. 2, 1993, p. 451-470. BENNETT, A. Currency Boards: Issue and Experiences, in Frameworks for Monetary Stability. Policy Issues and Country Experiences, IMF Washington, 1994. BORDO, M. "The Lender of Last Resort: Some Historical Insights", NBER Working Paper 3011, 1989. CAMARD, W. "Discretion with Rules? Lessons from the Currency Board Arrangement in Lithuania", IMF Paper on Policy Analysis and Assessment, 96/1, 1996. CAMPBELL, J.; PERRON, P. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots", NBER Technical Working Paper N100, 1991. CAPRIO, G.; DOOLEY, M.; LEIPZIGER, D.; WALSH, C. "Lender of Last Resort Function Under a Currency Board. The Case of Argentina", World Bank Working Paper 1648, 1996. DIAMOND, D.; DYBVIG, P. "Bank Runs, Deposits Insurance, and Liquidity", Journal of Political Economy, Vol. 91, Issue 3, 1983, p. 401-419. ENDERS, W. Applied Econometric Time Series, John Wiley & Sons, Inc., 1995. FREIXAS, X.; GIANNINI, C.; HOGGARTH, G.; SOUSSA, F. "Lender of Last Resort: A Review of Literature", Bank of England Financial Stability Review, Issue 7, 1999, p. 151-167 GHOSH, A.; GULDE, A.-M.; WOLF, H. "Currency Boards: More than a Quick Fix?", Economic Policy, Vol. 15, Issue 31, 2000, p. 269-335 GRIFFITHS, M.D.; WINTERS, D.B. "Day of the Week Effects in Federal Funds Rates: Further Empirical Findings", Journal of Banking and Finance, 1995, p. 1265-1284. HAMILTON, J. "Measuring the Liquidity Effect", The American Economic Review, Vol. 87, No. 1, 1997, p. 80-97. CETAI, HEC-Montréal 17 Cahier de recherche 2001-01 The Nonorthodox Currency Boards: The Case of Bulgaria HANKE, S.; SCHULER, K. Currency Boards for Developing Countries: A Handbook, (An International Center for Economic Growth Publications), San Francisco, California, ICS Press, 1994. LEVIATAN, N. (ed.). Proceedings of a Conference on Currency Substitution and Currency Boards, Washington D.C., The World Bank, 1992. MILLER, J. "The Currency Board in Bulgaria: The First Two Years", Bulgarian National Bank Discussion Paper, DP/11/99, 1999. MORAS, I. "Exchange Rate Based Inflation Stabilization with a Currency Board, European University Institute, Department of Economics, August 1998. NENOVSKY, N.; HRISTOV, N. "Financial Repression and Credit Rationing under Currency Board Arrangement for Bulgaria", Bulgarian National Bank Discussion Paper, DP/2/98, 1998. ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT. Economic Survey of Bulgaria, OECD, Paris, 1999. PETROV, B. "Bank Reserves Dynamics under Currency Board in Bulgaria, Bulgarian National Bank Discussion Paper, DP/15/00, 2000. ROUBINI, N. The Case Against Currency Boards: Debunking 10 Myths about the Benefits of Currency Boards, 1998 [http://www.stern.nyu.edu/~nroubini/asia]. SCHULER, K. Currency Boards, Dissertation, Fairfax, Virginia, George Mason University, 1992. SCHULER, K. "The Importance of Being Orthodox", Hong-Kong Baptist University 's International Workshop on Currency Boards, HongKong, 9 October 1999. SCHWARTZ, A. "Currency Boards: Their Past, Present and Possible Future Role", Carnegie-Rochester Conference Series on Public Policy 39, 1993, p. 147-187. TSANG, S. A Study of the Linked Exchange Rate System and Policy Options for HongKong, HongKong Policy Research Institute Ltd., 1999. WILLIAMSON, J. What Role Currency Boards, Washington, D.C., Institute for International Economics, 1995. Cahier de recherche 2001-01 18 CETAI, HEC-Montréal