A Note on the Competing Causes of High Inflation in Bulgaria during the 1990s: Money Supply or Exchange Rate?

ABSTRACT

This note aims at analyzing Bulgaria’s high inflation regime during the 1990s. Two competing causes of high inflation are explored: changes in the rate of growth of the money supply in the economy and changes in the foreign exchange rate. Both correspond to traditional theoretical explanations: the monetarist view and the balance of payments approach. Evidence suggests that a variation in the exchange rate is significant in explaining the high inflation regime in Bulgaria whereas monetary growth appears to be insignificant. Consequently, the paper underlines the importance of stabilizing the exchange rate in the short run in order to avoid high inflation.

KEYWORDS:

• Inflation
• money supply
• exchange rate

JEL CODES:

• E31
• P22

Acknowledgment

We are grateful to Alberto Bagnai and David Giles for their technical assistance. We would like to thank Christopher Sutcliffe for his attentive reading. We also benefitted greatly from the comments of two anonymous referees. Of course, usual caveats apply.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 See Charles and Marie (2016) for an alternative definition of hyperinflation.

2 See, for instance, Ivanova (2009) and Begović, Adnett, and Pugh (2016) on the various effects of the currency board.

3 As emphasized by Câmara and Vernengo (2001), there is a close relationship between neo-structuralists and the BP school: both reject the QTM and recognize that the exchange rate may have a substantial effect on price dynamics; but they also insist on the impact of distributive conflict and indexation mechanisms as underlined by Missio, Jayme, and Oreiro (2015, p. 260). For a recent empirical assessment for Argentina see, for example, Frenkel and Friedheim (2017).

4 Monetary growth is deseasonalized using the US Census Bureau’s X13 seasonal adjustment program.