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In 1996/1997 Bulgaria was hit by a severe financial crisis, spreading from a banking crisis to a currency crisis. We argue that the Bulgarian Financial Crisis might serve as an illustrative example of a twin crisis involving both a currency and a banking crisis. While the Bulgarian Crisis had some properties of the so-called fundamental crises, as explained by first-generation models of currency crises, the severity of the crisis was primarily (but not only) due to systematic and path-dependent moral hazard behaviour of the banking sector. Special attention is paid to the crucial role the Bulgarian National Bank played in the pre-crisis and crisis periods when acting more as a lender of first resort rather than a lender of last resort (LOLR). We also show how Bulgaria managed to overcome the crisis by introducing a second-generation currency board allowing the central bank to act strictly as a limited LOLR, thereby making the country less prone to a financial crisis in the future.

In recent years, a number of countries have introduced currency boards (CBs). Gaining in swing and popularity, this newgeneration CB preserves, to varying degrees, the Central Bank’s ability to function as the lender of last resort (LOLR) and to intervene in case of systemic risk. Recently, Central Bank flexibility has been preserved in different forms in Hong Kong, Argentina, Estonia, Lithuania and Bulgaria. Macro- and microeconomic implications of such departures from orthodox CBs have not been thoroughly studied yet. Theoretically, the introduction of this second-generation CB provides an opportunity for conducting discretionary monetary policy (though certainly not in its typical form). Some major, ensuing questions require answers. What are the new channels of monetary policy? Does an orthodox self-regulating (automatic) mechanism work with second-generation CBs? How are monetary disequilibria in the economy adjusted? We define an automatic mechanism as “the presence of a positive cointegration relationship between the overall balance of payments (BOPs) and the reserve money, and the absence of discretionary variables in the model.” The theoretical hypothesis is checked empirically based on Bulgarian data.

The '70s of the 19th century have always held a special attraction point for specialists in the history of thought. For economic theory, these are the years of the Great Crossroads when economic theory was at critical breaking point, after which several powerful theoretical streams emerged that were to determine later on the overall course of the evolution of economics. The book written by the French economist and philosopher Gilles Campagnolo (Criticisms of Political Economy, Menger, Austrian School of Economics and the German Historical School, Routledge, New York, 2009, pp. 416) is an attempt to find out exactly what happened in the years of the Great Crossroads. It offers not only historical reading, but also theoretical interpretation to explaining the evolution, mutual influence and intermingling of the above individual schools of thought in the economic science. The present paper is a review essay on Campagnolo’s new book.

The '70s of the 19th century have always held a special attraction point for specialists in the history of thought. For economic theory, these are the years of the Great Crossroads when economic theory was at critical breaking point, after which several powerful theoretical streams emerged that were to determine later on the overall course of the evolution of economics. The book written by the French economist and philosopher Gilles Campagnolo (Criticisms of Political Economy, Menger, Austrian School of Economics and the German Historical School, Routledge, New York, 2009, pp. 416) is an attempt to find out exactly what happened in the years of the Great Crossroads. It offers not only historical reading, but also theoretical interpretation to explaining the evolution, mutual influence and intermingling of the above individual schools of thought in the economic science. The present paper is a review essay on Campagnolo's new book.

The paper presents a cross-country analysis of the second generation of currency boards (CB) introduced in three East European countries: Bulgaria, Estonia and Lithuania. We focus on their institutional, legal and political characteristics which are closely associated with the operation of the automatic mechanism (AM) of currency boards. The presence of an automatic mechanism within the framework of the currency board is often cited as a major counterpoint to the “discretion and subjectivity” of a classical central bank. Since there is no precise definition of automatic mechanisms in the literature, we define it as: “the presence of a positive cointegration relationship between the balance of payments and the reserve money (or money supply) and absence of discretionary variables in the model.” When discretionary variables are present in the model in one form or another, we may speak of a “mechanism for adjustment through discretion – conscious or unconscious.” Within the framework of the second generation of currency boards, we reduce the channel of discretion to the presence of atypical balance sheet items and employment of a number of monetary policy instruments. We seek in this article to compare currency board automatic mechanism in Bulgaria, Estonia and Lithuania.L’article procède d’une analyse transversale par pays de la deuxième génération des “bureaux d’émission” (currency boards) introduits dans trois pays de l’Europe de l’Est. L’accent est mis sur les caractéristiques institutionnelles, juridiques et politiques qui sont étroitement associées à l’opération du mécanisme automatique (MA) des bureaux d’émission. L’existence d’un mécanisme automatique dans la structure d’un bureau d’émission est souvent mise en avant comme l’argument majeur à l’encontre de la “discrétion” et la “subjectivité” d’une banque centrale classique. Parce qu’il n’existe aucune définition précise du mécanisme automatique dans la littérature, nous la définissons comme “la présence d’une relation positive de cointégration entre la balance des paiements et les réserves monétaires (ou l’offre de monnaie) et l’absence de variables discrétionna- ires dans le modèle”. Quand des variables discrétionnaires sont présentes dans le modèle sous une forme ou une autre, nous pouvons parler d’un “mécanisme d’ajustement discrétionnaire – conscient ou inconscient”. Au sein de la structure de la deuxième génération des bureaux d’émission, la discrétion se réduit à la présence de postes atypiques dans le bilan et à l’emploi d’un certain nombre d’instruments de politique monétaire.L’article propose une comparaison du mécanisme automatique en Bulgarie, Estonie et Lithuanie.

The paper presents a cross-country analysis of the second generation of currency boards (CB) introduced in three East European countries: Bulgaria, Estonia and Lithuania. We focus on their institutional, legal and political characteristics which are closely associated with the operation of the automatic mechanism (AM) of currency boards. The presence of an automatic mechanism within the framework of the currency board is often cited as a major counterpoint to the "discretion and subjectivity" of a classical central bank. Since there is no precise definition of automatic mechanisms in the literature, we define it as: "the presence of a positive cointegration relationship between the balance of payments and the reserve money (or money supply) and absence of discretionary variables in the model." When discretionary variables are present in the model in one form or another, we may speak of a "mechanism for adjustment through discretion - conscious or unconscious." Within the framework of the second generation of currency boards, we reduce the channel of discretion to the presence of atypical balance sheet items and employment of a number of monetary policy instruments. We seek in this article to compare currency board automatic mechanism in Bulgaria, Estonia and Lithuania.