Building Monetary Credibility in a Transforming Economy

This paper uses unique survey data from Bulgaria, a transition economy with a currency board, to examine the following questions: 1) what is the level of confidence in the currency board over various time horizons, 2) how cognizant is the population of the restrictions a currency board imposes on monetary policy, and 3) whether those restrictions enhance agents' confidence in sustained financial stability. The results show that eliminating monetary policy enhances short-term credibility but does not have a significant effect of long-term credibility. Backing the local currency with foreign exchange reserves enhances both short-term and long-term credibility. However, the credibility-enhancing effect of the currency board is restricted to a group of agents who are more directly involved in the economy. The expectations of the remaining large majority of the population are based on political attitudes and various life experiences.Bulgaria, transition economy