The Credit Boom in Bulgaria since 2002 to the Present

Date of Award

2006

Document Type

Thesis

Degree Name

Bachelors

Department

Social Sciences

First Advisor

Strobel, Frederick

Keywords

Credit Boom, Commercial Banks, Bulgaria

Area of Concentration

Economics

Abstract

Since the beginning of 2002, a rapid credit expansion has taken place in the Bulgarian economy. The annual growth rate of commercial banks� credit to the nonfinancial sector increased from 25.60% in 2000 to 45.70% in 2002 and further rose in the subsequent years. This boost in credit to domestic firms and households was the major engine driving the Bulgarian economy after more than a decade of difficult and painful transition from communism to an open-market economy. However, in 2004, the central bank became increasingly worried that the quick pace of the commercial banks� credit extension to the private sector was causing a rapid deterioration of the trade deficit and stimulating a price bubble in the realestate market. It therefore made a series of attempts to restrict the commercial banks in their lending. Nonetheless, its efforts proved futile due to the presence of a currency board in the country. The main purpose of this thesis will be to analyze how the credit boom has affected Bulgaria�s economy growth and whether it should be a concern for economic stability. The IS/LM/BP model will be developed and applied in order to facilitate the above analysis. The first chapter is a basic introduction to the thesis. The second chapter is focused on the construction of the IS/LM/BP model to explain how the model works. The third chapter�s main goal is to give a picture of how the banking system developed during Bulgaria�s transition to an open-market economy up to the start of the credit boom in 2002. It argues that commercial banks have played a vital role in the domestic economic development and that the pre-2002 period created a favorable domestic environment for a rapid credit expansion. The fourth chapter focuses on the credit boom itself. It analyzes how the credit boom developed and what were its immediate causes and fundamental characteristics. It is also discussed why the central bank was not able to curb the rapid credit expansion through the use of its only monetary-policy tool determining the minimum reserve requirements. In the fifth chapter, it is analyzed how the credit boom has so far affected domestic economic activity through the implementation of the IS/LM/BP model. The claim is that it has induced both higher autonomous expenditure and higher real money, thus shifting the IS and the LM curves outward. Therefore, real income has increased whereas the real interest rate has fallen. Additionally, the BP schedule�s downward shift has enabled the balance of payments to remain in surplus. In the sixth and final chapter, a brief conclusion is given. The author concludes that the credit boom has been beneficial to economic growth and that it has not resulted in any significant negative effects on the country�s vulnerability. The credit expansion is likely to continue in the following years aided by Bulgaria�s pending accession to the European Union in January 1, 2007.

Rights

This bibliographic record is available under the Creative Commons CC0 public domain dedication. The New College of Florida, as creator of this bibliographic record, has waived all rights to it worldwide under copyright law, including all related and neighboring rights, to the extent allowed by law.

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