Inflation Dynamics in Bulgaria: The Role of Policies

IMF Working Papers, September 29, 2023

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Common factors play a large role in the EU’s inflation variation but impact individual countries differently due to country-specific factors.
Greater weight of energy and food in Bulgaria’s CPI basket amplifies the impact of shocks on headline inflation.
Second-round effects in Bulgaria are likely pronounced, associated with a higher inflation persistence compared to the EU countries.
Recent ECB monetary tightening has been insufficient for Bulgaria and its transmission is weak.
Fiscal policy supported the recovery from the COVID crisis but added to inflation.

The paper analyses inflation dynamics in Bulgaria using different complementary econometrics technics.
Techniques referenced in keywords include Principal Component Analysis and VARl Sign restrictions.
Subject areas covered: Energy prices, Fiscal policy, Food prices, Inflation, Inflation persistence, Prices.

Monetary policy: ECB interest rates and ECB Policy rate tightening have been recent factors, but their transmission to Bulgaria is described as weak and insufficient to fully address inflation dynamics.
Fiscal policy: While fiscal support aided recovery from the COVID crisis, it also contributed to higher inflation.
Sectoral composition: The larger CPI weights for energy and food imply that shocks to these components have amplified effects on headline inflation in Bulgaria relative to the EU average.
Persistence and second-round effects: Higher inflation persistence and pronounced second-round effects imply that temporary shocks may have more enduring effects on inflation in Bulgaria than in other EU countries.