From Prosperity to Depression: Bulgaria and Romania (1996/97-2010)
42 Pages Posted: 20 Aug 2011
Date Written: April 19, 2011
Bulgaria and Romania are neighbouring countries, which have always been rivals. Following the decision on EU enlargement to include Bulgaria and Romania (late 1999) and with membership negotiations already started (2004), the race between the two countries gained momentum and comparisons of performances in the areas of economy and democracy became a regular practice. Around late 1990s the two countries took different trajectories, although in the direction of EU and market economy. The great divergence is lying primarily in the choice of monetary regime. While Romania continued to pursue and enhance its discretionary monetary policy and since 2005 has moved to inflation targeting, Bulgaria made an abrupt turn in mid-1997 and introduced a currency board arrangement. In this paper, we investigate how the monetary regimes choice shaped the structure of both economies and the behaviour of the public and private sector, how they modified the mechanisms of adjustments and how they concentrate risks. We discus the institutional compatibility of monetary regimes with EU accession and EU membership using the theoretical insights form Dooley (1997, 2000) insurance model hypothesis. One of the main hypotheses, which we illustrate empirically, says that Currency board concentrate all economic activity and risks in the private sector, hence increasing of the private debt, while discretionary monetary policy leads to greater public debt growth and lower fiscal discipline. EU integration as well as the current crisis has different effects when combination with different monetary regimes.
Keywords: post communist transformation, monetary regimes, global crisis, Bulgaria, Romania
JEL Classification: F33, F36, P20, P30
Suggested Citation: Suggested Citation