The objective of this paper is to study the influence of the international economic conjuncture on Bulgaria’s economic growth and business cycle. A vector autoregression (VAR) is employed to identify the main factors, which affect the growth and cyclicality of Bulgaria, the size and the direction of their impact. The cause-and-effect links between external economic conditions, the growth of real gross domestic product (GDP) and the output gap of Bulgaria have been investigated. The external opportunities and threats facing the Bulgarian economy under a currency board arrangement and a membership in the European Union have been outlined. Recommendations have been made on appropriate policies for using external opportunities and overcoming external threats. The study results indicate that the main international determinants of Bulgaria’s economic growth and business cycle are macroeconomic policies in the Euro Area.

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The specific design of the Bulgarian currency board arrangement (CBA), which provides an opportunity to the Bulgarian government to conduct discretionary monetary policy by changes in the fiscal reserve, was analyzed. The impact of government deposit fluctuations on the dynamics of reserve money and interbank interest rates was investigated. The hypotheses of an automatic adjustment mechanism and a liquidity effect under the Bulgarian currency board arrangement were tested. The methodology employed was a vector autoregression, which included the following variables: MBmonetary base; BPbalance of payments; GDgovernment deposit on the balance sheet of the Issue Department of the Bulgarian National Bank; MRRminimum required reserve ratio of commercial banks. The target variable was MB. Monthly data for the period January 1998 -December 2018 were used. The study results did not provide evidence of a statistically significant impact of changes in government deposit on reserve money and interbank interest rates. The hypotheses for the existence of an automatic adjustment mechanism and a liquidity effect did not find an empirical confirmation. JEL Classification Numbers: E42, E52, E62,

The goal of this research is to find out what determines monetary conditions in Bulgaria under a currency board arrangement – the automatic adjustment mechanism of the orthodox currency boards or discretionary policies of the government and the central bank. A time series vector autoregression for the period 1998-2018 is employed in order to investigate the impact of the fiscal reserve and the minimum required reserves of the commercial banks on the monetary base, the interbank interest rate, the money supply and the inflation rate. The empirical results indicate that the automatic adjustment mechanism does not function under the Bulgarian currency board but the policies of the government and the central bank have a discretionary effect on monetary conditions in the country.