Fiscal Deficits, Monetary Reform and Inflation in Transition Economies: The Case of Bulgaria

We develop a simple integrated framework to assess consistency between fiscal policy, monetary reform and inflation. The framework is designed to be applicable in transition economies, where reliable data are at a premium and the financial sector in a state of flux. The model is applied to Bulgaria and is used to assess the impact of financial reform, debt management and external debt relief on the relation between fiscal deficits and sustainable inflation. We also discuss the impact of a transition to market rate of interest on foreign and domestic debt, of a recovery of real output growth and delays in fiscal adjustment.