Impact of External Shocks on Bulgaria’s Growth and Cycle

Abstract

The objective of this paper is to study the influence of the international economic conjuncture on Bulgaria’s economic growth and business cycle. A vector autoregression (VAR) is employed to identify the main factors, which affect the growth and cyclicality of Bulgaria, the size and the direction of their impact. The cause-and-effect links between external economic conditions, the growth of real gross domestic product (GDP) and the output gap of Bulgaria have been investigated. The external opportunities and threats facing the Bulgarian economy under a currency board arrangement and a membership in the European Union have been outlined. Recommendations have been made on appropriate policies for using external opportunities and overcoming external threats. The study results indicate that the main international determinants of Bulgaria’s economic growth and business cycle are macroeconomic policies in the Euro Area.