ABSTRACT
Since 1991, the Bulgarian authorities have pursued the radical economic strategy also applied in other countries of the region to varying degrees and known as ‘shock therapy’. After price liberalization, a tax-based incomes policy was introduced to control cost-push inflation, while simultaneously attempts were made to try to limit the inevitable adverse social effects. The price liberalization initiated early in 1991 immediately led to active inflationary processes and a high rate of inflation. In 1992, the liberalization of fuel, electricity and agricultural prices led to a further upsurge in inflation. The development of exchange rates, notably the depreciation of the leva, was found to be of crucial importance: exchange rate has a positive coefficient in the inflation equation. The estimated parameters confirmed that the relatively low short-run propensity to consume was mainly the result of low real incomes, high inflation and savings compensations.
