Skip to main content
SpringerLink
Log in

Inflation and Sectoral Output Growth Variability in Bulgaria

  • Regular Article
  • Published:
Comparative Economic Studies Aims and scope Submit manuscript

Abstract

This paper analyzes the relationship between inflation and sectoral output growth variability in Bulgaria using a monthly data set from 2000:01 to 2012:08. The Bulgarian economy is working under a unique currency board setting that exclusively allows the government to influence the money supply through its fiscal position on the asset side of the central bank's balance sheet. Abrupt relative price changes across sectors bring fluctuations in sectoral output growth. Nevertheless, inflation effects on average output growth are positive and linear. Besides, persistent real exchange rate appreciation causes lower growth and higher variability under the pegged exchange rate regime.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Figure 1

Similar content being viewed by others

Notes

  1. Note that here with the incorporation of financial regulations, monetary policy impacts reserve requirements of the banks and hence reduces growth. The view that changes in financial variables can influence long-run growth has also been supported by Barro (2001) in the context of the East-Asian financial crisis. The paper predicted long-run effects of the banking crisis on investment for these countries.

  2. See Logue and Sweeney (1981) and Hess and Morris (1996) supporting a positive link between these two variables and Cecchetti and Ehrmann (1999) and Arestis et al. (2002), among others, supporting an inverse relationship through variability trade-off between inflation and output growth. According to the later, a lower inflation results lower inflation variability and higher output variability.

  3. Empirical work analyzing the impact of inflation on relative price variability includes Lach and Tsiddon (1993), Fielding and Mizen (2008) and Choi (2010).

  4. Although some studies, that is, Khan and Senhadji (2001) and López-Villavicencio and Mignon (2011) address the issue of emerging economies; nevertheless, they analyze the effects of inflation on overall GDP growth and hence ignore its effects on output growth variability among different sectors. High output growth variability among sectors certainly exerts an undesirable impact on the labor market due to frequent hiring and firing by firms.

  5. See Liu et al. (2011) and Dungey and Pagan (2000) on the influence of demand and supply shocks for small open economies and the role of stable monetary policy to control these shocks.

  6. However, here we did not disentangle the growth variability coming from inflation to the one resulting from structural changes. As both types of fluctuations have opposite effects on growth, separating both factors is an avenue of future research.

  7. It is important to note that here we are talking about the part of FDI that comes from privatization and not the whole FDI.

  8. See Minea and Rault (2011) on the absorption of external shocks and their effects on domestic variables of the Bulgarian economy under the currency board regime.

  9. Bomberger and Makinen (1993) and Ball and Mankiw (1995) validate the importance of oil price shocks.

  10. Here sectoral output growth variability; V t is calculated as V t =∑ i =1n((Δq it −Δq̄ it )2/(N−1)) while N represents the number of selected sector (see Iscan and Osberg, 1998, for more details).

  11. There is a large recent literature on inflation uncertainty and macroeconomic performance such as Fountas et al. (2006) and Grier and Grier (2006). However this work focuses only on overall GDP fluctuations and does not address sectoral output variability.

  12. Selected industries include Mining and quarrying, Mining of coal and lignite, Mining of metal ores, Other mining and quarrying, Manufacturing, Manufacture of food products, Manufacture of beverages, Manufacture of tobacco products, Manufacture of textiles, Manufacture of wearing apparel, Manufacture of leather and related products, Manufacture of wood and of products of wood and cork, except furniture; manufacture of articles of straw and plaiting materials, Manufacture of paper and paper products, Printing and reproduction of recorded media, Manufacture of chemicals and chemical products, Manufacture of basic pharmaceutical products and pharmaceutical preparations, Manufacture of rubber and plastic products, Manufacture of other non-metallic mineral products, Manufacture of basic metals, Manufacture of fabricated metal products, except machinery and equipment, Manufacture of computer, electronic and optical products, Manufacture of electrical equipment, Manufacture of machinery and equipment n.e.c., Manufacture of motor vehicles, trailers and semi-trailers, Manufacture of other transport equipment, Manufacture of furniture, Other manufacturing, Repair and installation of machinery and equipment, Electricity, gas, steam and air conditioning supply, Electricity, gas, steam and air conditioning supply, Intermediate goods, Energy goods, Investment goods, Consumer durables, and Consumer non-durables. For online data access see http://www.nsi.bg/otrasalen.php?otr=46.

  13. Data are taken from the US Energy Information Association http://www.eia.gov/dnav/pet/pet_pri_spt_s1_m.htm.

  14. The results of the Dickey Fuller test are available upon request from the author.

  15. This issue is addressed in Table 4 where production of energy sectors is separated from the other industrial sectors.

  16. Another frequently used approach called Smooth Transition Autoregressive (STAR) model, proposed by Teräsvirta (1994), was also applied to test the existence of non-linearity. However, the existence of non-linearity is rejected in both logistic and exponential SATR specifications. Our results and related MATLAB codes are available upon request from the author.

  17. It is important to mention that most of the selected industries are considered as tradable based on the trade openness criteria discussed above. As a result only 10 industries among the selected sample fall in non-tradable group. This division is done by Chukalev (2002) taking into account the subsidies provided by the Bulgarian government to different industries.

References

  • Akerlof, GA, Dickens, WT and Perry, GL . 1996: The macroeconomics of low inflation. Brookings Papers on Economic Activity 1996 (1): 1–76.

    Article  Google Scholar 

  • Arestis, P, Caporale, GM and Cipollini, A . 2002: Is there a trade-off between inflation and output gap? The Manchester School 70 (4): 528–545.

    Article  Google Scholar 

  • Ball, L and Mankiw, NG . 1995: Relative-price changes as aggregate supply shocks. Quarterly Journal of Economics 110 (1): 161–193.

    Article  Google Scholar 

  • Barro, RJ . 2001: Economic growth in East Asia before and after the financial crisis. National Bureau of Economic Research (NBER) Working Paper No. 8330. National Bureau of Economic Research: Cambridge, MA.

  • Blackburn, K . 1999: Can stabilization policy reduce long-run growth? The Economic Journal 109 (452): 67–77.

    Article  Google Scholar 

  • Blackburn, K and Pelloni, A . 2004: On the relationship between growth and volatility. Economics Letters 83 (1): 123–127.

    Article  Google Scholar 

  • Blanchard, O, Dell’Ariccia, G and Mauro, P . 2010: Rethinking macroeconomic policy. IMF Staff Position Note SPN/10/03.

  • Blanchard, O and Simon, J . 2001: The long and large decline in US output volatility. Brookings Papers on Economic Activity 32 (1): 135–174.

    Article  Google Scholar 

  • Bomberger, WA and Makinen, GE . 1993: Inflation and relative price variability: Parks’ study reexamined. Journal of Money Credit and Banking 25 (4): 854–861.

    Article  Google Scholar 

  • Burdekin, RCK, Denzau, AT, Keil, MW, Sitthiyot, T and Willett, TD . 2004: When does inflation hurt economic growth? Different non-linearities for different economies. Journal of Macroeconomics 26 (3): 519–532.

    Article  Google Scholar 

  • Cecchetti, SG and Ehrmann, M . 1999: Does inflation targeting increase output volatility? An international comparison of policymakers’ preferences and outcomes. National Bureau of Economic Research (NBER) Working Paper No. 7426. National Bureau of Economic Research: Cambridge, MA.

  • Chari, VV, Jones, LE and Manuelli, RE . 1996: Inflation, growth and financial intermediation. Proceeding, Federal Reserve Bank of St. Louis. pp. 41–58, May.

  • Choi, C-Y . 2010: Reconsidering the relationship between inflation and relative price variability. Journal of Money Credit and Banking 42 (5): 769–798.

    Article  Google Scholar 

  • Chukalev, G . 2002: The Balassa-Samuelson effect for the Bulgarian economy. Working paper Series, Agency of Economic Analysis and Forecasting.

  • Dungey, M and Pagan, A . 2000: A structural VAR model of the Australian economy. The Economic Record 76 (235): 321–342.

    Article  Google Scholar 

  • Fielding, D and Mizen, P . 2008: Evidence on the functional relationship between relative price variability and inflation with implications for monetary policy. Economica 75 (300): 683–699.

    Article  Google Scholar 

  • Fischer, S . 1993: The role of macroeconomic factors in growth. Journal of Monetary Economics 32 (3): 485–512.

    Article  Google Scholar 

  • Fountas, S, Karanasos, M and Kim, J . 2006: Inflation uncertainty, output growth uncertainty and macroeconomic performance. Oxford Bulletin of Economics and Statistics 68 (3): 319–343.

    Article  Google Scholar 

  • Friedman, M . 1977: Nobel lecture, inflation and unemployment. Journal of Political Economy 85 (June): 451–472.

    Article  Google Scholar 

  • Ghosh, A and Phillips, S . 1998: Warning: Inflation may be harmful to your growth. IMF Staff Papers 45 (4): 672–710.

    Article  Google Scholar 

  • González, A, Teräsvirta, T and Dijik, DV . 2005: Panel smooth transition regression models. Working Paper Series in Economics and Finance 604, Stockholm School of Economics.

  • Grier, R and Grier, KB . 2006: On the real effects of inflation and inflation uncertainty in Mexico. Journal of Development Economics 80 (2): 478–500.

    Article  Google Scholar 

  • Gylfason, T and Herbertsson, TT . 2001: Does inflation matter for growth? Japan and the World Economy 13 (4): 405–428.

    Article  Google Scholar 

  • Hess, GD and Morris, CS . 1996: The long-run costs of moderate inflation. Federal Reserve Bank of Kansas City, Economic Review: Second Quarter 81 (2): 71–88.

    Google Scholar 

  • Husain, AM, Mody, A and Rogoff, K . 2005: Exchange rate regime durability and performance in developing versus advanced economies. Journal of Monetary Economics 52 (1): 35–64.

    Article  Google Scholar 

  • Iscan, T and Osberg, L . 1998: The link between inflation and output variability in Canada. Journal of Money Credit and Banking 30 (2): 261–272.

    Article  Google Scholar 

  • Khan, MS and Senhadji, AS . 2001: Threshold effects in the relationship between inflation and growth. IMF Staff Papers 48 (1): 1–21.

    Google Scholar 

  • Lach, S and Tsiddon, D . 1993: The effects of expected and unexpected inflation on the variability of relative prices. Economics Letters 41 (1): 53–56.

    Article  Google Scholar 

  • Logue, DE and Sweeney, RJ . 1981: Inflation and real growth: Some empirical results: Note. Journal of Money, Credit and Banking 13 (4): 497–501.

    Article  Google Scholar 

  • López-Villavicencio, A and Mignon, V . 2011: On the impact of inflation on output growth: Does the level of inflation matter? Journal of Macroeconomics 33 (3): 455–464.

    Article  Google Scholar 

  • Lucas, RE . 1973: Some international evidence on output inflation trade-offs. American Economic Review 63 (3): 326–334.

    Google Scholar 

  • Liu, P, Mumtaz, H and Theophilopoulou, A . 2011: International transmission of shocks: A time-varying factor-augmented VAR approach to the open economy. Working Paper No. 425, Bank of England.

  • Minea, A and Rault, C . 2011: External monetary shocks and monetary integration: Evidence from the Bulgarian currency board. Economic Modelling 28 (5): 2271–2281.

    Article  Google Scholar 

  • Mirman, LJ . 1971: Uncertainty and optimal consumption decisions. Econometrica 39 (1): 179–185.

    Article  Google Scholar 

  • Nenovsky, N and Hristov, K . 2002: The new currency boards and discretion: Empirical evidence from Bulgaria. Economic Systems 26 (1): 55–72.

    Article  Google Scholar 

  • Nenovsky, N, Hirstov, K and Mihail, M . 2001: Comparing currency board automatic mechanism in Bulgaria, Estonia and Lithuania. Journal des Economistes et des Etudes Humaines 11 (4): 575–616.

    Article  Google Scholar 

  • Omay, T and Kan, E . 2010: Re-examining the threshold effects in the inflation-growth nexus with cross-sectionally dependent non-linear panel: Evidence from six industrialized economies. Economic Modelling 27 (5): 996–1005.

    Article  Google Scholar 

  • Parsley, DC . 1996: Inflation and relative price variability in the short run and long run: New evidence from the United States. Journal of Money Credit and Banking 28 (3): 323–341.

    Article  Google Scholar 

  • Petrov, B . 2000: Bank reserve dynamics under currency board in Bulgaria. Discussion Paper DP 15/2000, Bulgarian National Bank.

  • Romer, D . 1993: Openness and inflation: Theory and evidence. The Quarterly Journal of Economics 108 (4): 869–903.

    Article  Google Scholar 

  • Rousseau, PL and Wachtel, P . 2002: Inflation thresholds and the finance-growth nexus. Journal of International Money and Finance 21 (6): 777–793.

    Article  Google Scholar 

  • Sarel, M . 1996: Nonlinear effects of inflation on economic growth. IMF Staff Papers 43 (1): 199–215.

    Article  Google Scholar 

  • Singh, K and Kalirajan, KP . 2003: The inflation-growth nexus in India: An empirical analysis. Journal of Policy Modeling 25 (4): 377–396.

    Article  Google Scholar 

  • Taylor, JB . 1979: Staggered wage setting in a macro model. The American Economic Review, American Economic Association 69 (2): 108–113.

    Google Scholar 

  • Teräsvirta, T . 1994: Specification, and evaluation of smooth transition autoregressive models. Journal of the American Statistical Association 89 (425): 208–218.

    Google Scholar 

  • William, J . 2009: Heeding Daedalus: Optimal inflation and the zero lower bound. Brookings Papers on Economic Activity 2009 (Fall): 1–37.

    Article  Google Scholar 

  • Yilmazkuday, H . 2011: Thresholds in the finance-growth nexus: A cross-country analysis. The World Bank Economic Review 25 (2): 278–295.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Laboratoire d’Economie d’Orléans (LEO), Faculté de Droit, d’Economie et de Gestion, Université d’Orléans, Orléans, 2, Cedex, France

    Muhammad Khan

Authors
  1. Muhammad Khan
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

About this article

Cite this article

Khan, M. Inflation and Sectoral Output Growth Variability in Bulgaria. Comp Econ Stud 55, 687–704 (2013). https://doi.org/10.1057/ces.2013.5

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/ces.2013.5

Keywords

JEL Classifications

Search

Navigation