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Monetary shocks and nominal exchange rate dynamics. Monetary and exchange market pressure models: Evidence from Bulgaria

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posted on 2023-09-06, 03:11 authored by Assen Assenov

This dissertation is an empirical study of the role of monetary police in the exchange rate dynamics of a small country transitioning to an open market economy. In particular, this study analyzes the role of monetary policy in the process that led to collapse of the Bulgarian currency at the end of 1996 and beginning of 1997 and led to the introduction of currency board. First, this research uses a flexible price monetary approach model to estimate the role of the monetary policy in the dynamics of the exchange rate of the Bulgarian currency. Second, we use the VAR and SVAR specifications of the exchange-market-pressure model to investigate the stand of Bulgarian monetary policy and its effect on the exchange rate. The exchange-market-pressure model is a natural combination of the monetary approach to the balance of payment and the monetary approach to exchange rate determination. The model predicts that the flow of excess supply of money under flexible exchange rate will lead to an increase of exchange market pressure, which measures the exchange-rate depreciation and official exchange-market intervention. The main findings of the research suggest that the dynamic responses of exchange-market pressure to monetary policy shocks are consistent with standard monetary theory: domestic credit shocks provide additional liquidity to the banking system and increase the exchange-market pressure. Monetary policy shocks led to increased exchange market pressure and the collapse of the Bulgarian lev, and it resulted in the adoption of a currency board on July 1, 1997. The currency board restrained the expansionary monetary policy which in turn reduced the exchange-market pressure and, along with fiscal macroeconomic policy, restored the credibility of the national currency and stabilized the financial system. Bulgaria's unfortunate experience of a collapsed national currency is relevant to the choice of monetary policy for many countries in transition and emerging markets today.

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American University

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English

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Thesis (Ph.D.)--American University, 2006.

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http://hdl.handle.net/1961/thesesdissertations:3248

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application/pdf

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Part of thesis digitization project, awaiting processing.

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