Does a discretionary policy or an automatic adjustment mechanism determine monetary conditions in Bulgaria?

Abstract

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.