Did the currency board resolve Bulgaria's financial crisis of 1996-97?

Abstract

<P> This paper analyzes the causes behind the Bulgarian financial crisis of 1996 and 1997. IMF staff economists and the policy adopted by the IMF focuses on a monetary explanation for banking and financial crises in transitional economies. Accordingly, the solution they offer is a monetary solution-- specifically, a currency board. Currency boards in effect force governments to adhere to a specific monetary rule. This prevents the development of necessary central bank functions. </P><P>The paper argues that the financial crisis in Bulgaria was due to poor banking regulation and the problems associated with valuing capital assets in transitional economies. The crisis was therefore not caused by purely monetary phenomena such as too much liquidity. Rather, it was the outcome of the interaction of chaotic hysteresis and financial fragility.</P>

Keywords:

• banking crises
• currency boards
• financial panics
• transitional economies