The currency board in Bulgaria and its impact on sectoral economic activity

This paper investigates the impulse reaction of five economic sectors to various monetary policy shocks under the currency board regime in Bulgaria. For that purpose, we have estimated five reduced form VAR models with quarterly data over the period 2001Q1 to 2019Q4 for the sectors of agriculture, manufacturing; construction; real estate, and trade, transport and accommodation activities. The relevant impulse response functions represent three monetary transmission channels, in particular via the overnight interbank market rate, the consumer price index and the real effective exchange rate. We found that there is strong heterogeneity between sectors response to the different monetary policy shocks even under a currency board regime. The differences in the reaction are both in terms of depth, direction and duration. The monetary policy has strong positive impact on construction, and to a lesser extent on manufacturing. The response of the agriculture; trade, transport and accommodation activities is rather negative especially in the long term.