SGER: Monetary Credibility in a Transforming Economy

Georgia State University Research Foundation, Inc., Atlanta GA

Investigators

Abstract

The objective of this project is to contribute to knowledge on the process of financial stabilization in transition economies. This Small Grant for Exploratory Research (SGER) generates data from national surveys conducted in Bulgaria, a transition country in South East Europe, which implemented a currency board in1997 to combat years of high inflation. The surveys are large in scope and include questions on expected devaluation, expected inflation, attitudes toward the monetary regime, beliefs about the operation of the currency board, and preferences over alternative monetary regimes. Combined with a rich set of demographic characteristics, the data are used to study the evolution of credibility over time, the various influences on agents' beliefs and expectations, the process of learning about the regime, and the political outcomes of stabilization for the population at large and for different social groups defined on the basis of age, political affiliation, gender, income, education, and employment status. Four surveys have already been completed in the first four years of the currency board. This SGER would make it possible to build on that work by conducting one more survey and by continuing the analysis of the economic effects of credibility. With an application for additional financing at that point, the final objective is to generate a data series that span the lifetime of the currency board from its inception to Bulgaria's entry into the European Monetary Union. Survey data are needed because transition economies do not have financial markets, which are developed enough to provide a menu of interest rate and other financial data required for such research. In addition, the surveys make it possible to examine not only macro level but also deeper disaggregated social dynamics and effects, which are difficult to observe otherwise. Financial stabilization is studied in a broad political economy and institution-building framework, which is appropriate in the context of a nation in transition. So far, the surveys have revealed a number of unique insights. The analysis informs three important policy issues. First, the project helps understand the process of monetary institution building in transition economies. Second, it informs the choice of monetary regimes in countries, which are in membership negotiations with the European Union. Third, it generates predictions important for countries, which consider implementing a currency board. In addition to its research and policy relevance, the project also contributes to education and training through the activities of the Principal Investigator (PI) and the Andrew Young School of Policy Studies (AYSPS) at Georgia State University. The AYSPS conducts training programs for government officials and collaborates on curriculum development with university faculty from several developing countries. The project generates useful knowledge for these activities. The PI advises several graduate students who work on development issues similar to those studied in the project. Finally, the project enhances knowledge about Bulgaria, a country that has not received much research attention despite its interesting transition dynamics its important geographic position on the Balkans.