The introduction of the Currency Board in Bulgaria in July 1997 may be viewed as an extreme institutional change of the monetary regime and as its discrete interruption. Bulgaria switched from a regime of discretionary and subjective money supply management and floating exchange rate to an extremely passive and static form of monetary rule. Indeed, under the Currency Board regime the monetary base is covered 100 percent and above with foreign reserves, the exchange rate is fixed by law, and no monetary policy is carried out. There is an automatically balancing mechanism according to which the dynamics of the monetary base (and indirectly of the money supply) follow the dynamics of the country's balance of payments. (1)
The Currency Board in Bulgaria was introduced after the dramatic financial crisis at the close of 1996 and the beginning of 1997, when the national currency completely lost its major functions, almost one third of the banks failed, the foreign exchange reserves were almost entirely depleted, and inflation reached 240 percent in February 1997. (2) The financial crisis was accompanied by social protests and a political crisis, which led to the dissolution of Parliament and to early elections (two years prior to term). On February 17, 1997, the major political forces signed an agreement for the introduction of a currency board. The elections in April were won by a right-wing party, and the currency board was introduced on July 1.
Institutionally, the Bulgarian Currency Board differs from its orthodox forms, which are typical of the colonial system. It retains some possibilities for discretion (such as changing the minimum reserve requirement) and intervention in events of systemic risk (such as a restricted lender-of-last-resort function). Organizationally, the Bulgarian National Bank was divided into two departments, with the first one (Issue Department) comprising the most liquid assets and liabilities, and in effect performing the role of a currency board, and the second (Banking Department) retaining certain discretionary functions. The two departments are linked by the means of the Banking Department's deposit in the liability of the Issue Department, which is the net value of the Currency Board and allows for refinancing of banks in cases of systemic crisis (see table 1). (3) A third department was also established-the Banking Supervision Department-which imposes much more stringent (compared with international norms) requirements for the bank capital adequacy and bank liquidity ratios.
The analysis of currency board introduction in Bulgaria may serve as a starting point for a number of theoretical and empirical conclusions on institutional change in general and in transition economies in particular.
First, monetary regime change has been rarely analyzed using the instruments of institutional economics and political economy (generally it is treated conventionally within the framework of mainstream macroeconomic theory). (4) Considering monetary regime change as institutional change provides opportunity for seeking common ground between monetary theory and institutional analysis.
Second, although the need to incorporate institutions in the study of the transition process has been increasingly discussed, this has not been done so far in the realm of money where, generally, the paradigm of neoclassical economics is transferred mechanically. (5) Indeed, the few empirical studies of the role of institutions in transition economies (Havrylyshyn and Rooden 2000; Raiser, Di Tommaso, and Weeks 2001) have not incorporated any variable for monetary regime. Furthermore, the monetary regime change is related to one of the most essential problems of post-socialism-the overcoming of soft budget constraints. (6) Soft budget constraints in transition economies are genetic (inherited from the administrated economy) and systemic (encompassing to a different extent the relations among all agents). Hardening the soft budget constraints is part of the initial accumulation process and social redistribution of wealth. (7)
Third, notwithstanding achievements in constructing a theoretical basis of institutional change analysis, the empirical methodology has not been developed yet (Alston 1996). (8) The study of a specific case of a radical monetary regime change would give a starting point for new theoretical and empirical approaches and the opportunity to construct quantitative indicators for institutional change. The introduction of the Currency Board in Bulgaria (9) could serve as a "laboratory" for the analysis of institutional change, which features two types of logic-one being visible and conventional, and the other deeper and more difficult to perceive, yet determining the first one. The visible logic is associated with the dynamics of traditional monetary variables, while the invisible one relates to the conflicts of interest between the various groups of agents. In both cases the ultimate point of analysis is the same-the financial crisis. These two approaches are mutually nonexclusive, and they supplement each other. The present study concentrates on the "clash of interests" in introducing the Currency Board in Bulgaria. The traditional approach is described elsewhere (see, for example, Berlemann et al. 2002).
Indeed, we attempt to answer a number of questions in the context of the specific situation in Bulgaria: (1) What provokes the monetary regime change (= institutional change)? (2) Which are the driving forces and their interests? (3) How is institutional change effected, that is, what are its dynamics? Without pressing the matter, we will test our main hypothesis, namely whether and to what extent institutional change is the result of economics actors' interests and strategies. Furthermore, the Currency Board introduction can be viewed as an attempt to impose hard budget constraints on the central bank as an initial impulse for hard budget constraints first on the fiscal system and then along the entire chain of debtor-creditor relations. In this sense, it represents a change in the distribution of power between debtors and creditors in favor of creditors.
The methodology and ideas of the paper draw on a number of studies. The importance of power configurations in the institutional change analysis is pointed out in Marx 1894, Perroux 1973, and Galbraith 1976 and 1984 and fits well with John R. Commons' definition of institutions as "collective action in control, liberation, and expansion of individual action" (1931) and his interest in "strategic transactions" aiming to control and influence the process of institutional change. (10) Mancur Olson (1966, 1995, 2000) and Douglass North (1990, 1994, 1997) underlined also the role of organized groups of interest for a change, while Yorgos Rizopoulos and Lyazid Kichou (2001) suggested that institutional change can be analyzed as a political interaction process between organizations diffusing institutional rules and organizations consuming institutional rules. (11) Furthermore, recent research on the political economy of transition in general (Kornai 2000; Roland 2001 and 2002) and the financial/monetary system in particular (Berglof and Bolton 2002; Shleifer and Treisman 2001) has been taken into consideration.
Treating the monetary regime change as a conflict between debtors and creditors originates from Marx and is elaborated by contemporary authors like Michel Aglietta and Andrd Orldan (1984). Previous political and economic analysis of international monetary regimes and financial institutions was very useful (Keohane 1982; Vaubel 1991; Kdbabdjian 1999; Cohen 2000; Cooper 2000; Gilpin 2001; Willet 2001), as well as some insights from monetary history concerning the evolution of monetary regimes (Bordo and Jonung 1990; Redish 1990; Friedman 1992; Weatherford 1998; White 1999). Finally, our paper has some points of contact with the theory of endogenous money supply, where money creation is viewed as a result of the interaction between the real sector, the state, and the commercial banks, rather than as a result of the autonomous decision of the central bank (Moore 1988; Dow and Dow 1989; Beyer 1993) (12) and with the idea of the determining role of the state in the creation of money (Wray 1998; Bell 2001).
Overall, our approach may be defined as positive as we attempt to describe and analyze the change of the monetary regime, not to judge whether this change is efficient or not.
The body of this paper is structured as follows: The first section presents working definitions and formulates our basic theoretical statements. The second section deals with the typology of major players, their interests, and their positions before and after the Currency Board introduction in Bulgaria. The next section summarizes and theoretically retells (13) the extreme monetary change dynamics during 1996-1997. The concluding section discusses the results of the study and the implications for future research.
The Monetary Regime Change as a Conflict between Creditors and Debtors
Adapting some institutional approaches to monetary subject matter, we provide the following definitions.
We define monetary institutions as sets of rules-tacitly accepted as well as explicitly codified-norms, and shared knowledge related to monetary behavior, including the influence, reproduction, and enforcement devices which materialize them. Monetary institutions determine money demand and supply. We presume that formal rules dominate money supply while informal rules and behavior play a more important role in money demand (however, it is possible for informal rules to penetrate deeply in the money creation mechanism). The whole set of monetary institutions form a specific structure and constitute the monetary system.
Generally monetary organizations include collective economic agents pursuing specific goals within a given institutional...