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Bulgarian lev is not overvalued.
submited on 06.01.2006 in category Political stability | Monetary policy | Macroeconomic developments
submited on 06.01.2006 in category Political stability | Monetary policy | Macroeconomic developments
The attempts to estimate the “real price” of the lev is apparently becoming a live question. The debate which some analysts are starting now may result overdue when the actual the euro currency substitution happens in Bulgaria.
This kind of debates caused the start of the discussion on that whether or not the Bulgarian lev was overvalued or undervalued. Probably these statements are related to some arguments like: “the inflation of the lev is much faster than the inflation of euro (measured through CPI) and consequently the fixed exchange rate do not reflect the price changes in Europe and Bulgaria.
The first part of this statement is empirically correct. The consumer prices in Bulgaria (as they are measured by NSI) grow significantly faster than the consumer prices in Europe (measured by Eurostat). Presently the average annual inflation in Bulgaria is about 5% while the latest data from the Eurozone is showing that the inflation remains around 2%.
The second part of the statement assumes that the price indexes reflect relatively correctly the price changes in the two compared areas. If we admit that this part is correct too, than we will accept that the fixed exchange rate reflects accurately the consumer price changes. But the truth is that the fixed exchange rate never aimed to reflect precisely the consumer price changes.
The consumer prices in Sofia and Dobrich are changing differently. Presently the service prices in Dobrich are significantly lower compared to these in the capital. The dynamics is also different. But this kind of statement never served to argue that the levs in Dobrich were undervalued (or overvalued) compared to the levs in Sofia. The comparison between the prices in Bulgaria and the Eurozone founded on the exchange rate is much the same. We do not deny that the same amount of euro purchases different amount of goods. The situation when you compare the Bulgarian cities is very similar without thinking to change the exchange rate of the lev that is actually 1:1.
The other argument that it is not very popular among the theorists, but commonly used in daily conversations, is that one Big Mac obviously costs different amount of euro (or levs) in Frankfurt and in Sofia. The costlier German Big Mac in nominal terms is the reason that some people consider the Bulgarian lev to be “overvalued” compared to the euro. According to this logic if the currency rate was “real”, than it would buy the same amount of burgers wherever.
The difference between the non-traded goods in the different cities is absolutely normal part of the economic reality. If there were not any kind of administrative obstacles to competition, the prices of traded goods would be relatively equal elsewhere (having in mind some differences because of the transport). But the prices of goods that only can be consumed, i.e. non-traded goods can not be expected to be equal elsewhere.
In some cities, where the labor productivity (measured in material goods) is higher, non-traded goods will have the tendency to be more expensive. In Haskovo the prices of non-traded goods are around 20% cheaper compared to these in Varna, which explains the differences between the amount of capital in the two cities.
In a situation where the Central Bank does not manipulate the money supply it is not correct to speculate whether a local currency is “overvalued” or “undervalued”. Claiming that the lev is undervalued (overvalued) against the euro is like claiming that the stotinka is undervalued (overvalued) against the lev. There are not any solid arguments supporting the claim that the actual exchange rate of the lev threatens the competitiveness of the Bulgarian producers. Bulgaria should adopt the euro as domestic currency exchanging the levs for euros at the current rate.
This kind of debates caused the start of the discussion on that whether or not the Bulgarian lev was overvalued or undervalued. Probably these statements are related to some arguments like: “the inflation of the lev is much faster than the inflation of euro (measured through CPI) and consequently the fixed exchange rate do not reflect the price changes in Europe and Bulgaria.
The first part of this statement is empirically correct. The consumer prices in Bulgaria (as they are measured by NSI) grow significantly faster than the consumer prices in Europe (measured by Eurostat). Presently the average annual inflation in Bulgaria is about 5% while the latest data from the Eurozone is showing that the inflation remains around 2%.
The second part of the statement assumes that the price indexes reflect relatively correctly the price changes in the two compared areas. If we admit that this part is correct too, than we will accept that the fixed exchange rate reflects accurately the consumer price changes. But the truth is that the fixed exchange rate never aimed to reflect precisely the consumer price changes.
The consumer prices in Sofia and Dobrich are changing differently. Presently the service prices in Dobrich are significantly lower compared to these in the capital. The dynamics is also different. But this kind of statement never served to argue that the levs in Dobrich were undervalued (or overvalued) compared to the levs in Sofia. The comparison between the prices in Bulgaria and the Eurozone founded on the exchange rate is much the same. We do not deny that the same amount of euro purchases different amount of goods. The situation when you compare the Bulgarian cities is very similar without thinking to change the exchange rate of the lev that is actually 1:1.
The other argument that it is not very popular among the theorists, but commonly used in daily conversations, is that one Big Mac obviously costs different amount of euro (or levs) in Frankfurt and in Sofia. The costlier German Big Mac in nominal terms is the reason that some people consider the Bulgarian lev to be “overvalued” compared to the euro. According to this logic if the currency rate was “real”, than it would buy the same amount of burgers wherever.
The difference between the non-traded goods in the different cities is absolutely normal part of the economic reality. If there were not any kind of administrative obstacles to competition, the prices of traded goods would be relatively equal elsewhere (having in mind some differences because of the transport). But the prices of goods that only can be consumed, i.e. non-traded goods can not be expected to be equal elsewhere.
In some cities, where the labor productivity (measured in material goods) is higher, non-traded goods will have the tendency to be more expensive. In Haskovo the prices of non-traded goods are around 20% cheaper compared to these in Varna, which explains the differences between the amount of capital in the two cities.
In a situation where the Central Bank does not manipulate the money supply it is not correct to speculate whether a local currency is “overvalued” or “undervalued”. Claiming that the lev is undervalued (overvalued) against the euro is like claiming that the stotinka is undervalued (overvalued) against the lev. There are not any solid arguments supporting the claim that the actual exchange rate of the lev threatens the competitiveness of the Bulgarian producers. Bulgaria should adopt the euro as domestic currency exchanging the levs for euros at the current rate.
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