Еconomic Policy Under Global Flight to Safe Assets and Effective Lower Bound: the Bulgarian Prospects

Abstract

The study is motivated by the (global) trend of excess savings and the restrictive response to investment in productive capital despite abundant financing. While there is heterogeneity among countries, in Bulgaria we can observe both declining market interest rates (rm) and long-standing investment stagnation in terms of gross capital formation as a share of GDP. This stylized fact can be described and explained through the NeoWicksellian concept of the natural interest rate (r*), with potentially secular low values of r* posing serious challenges to further stimulating interest-sensitive aggregate expenditures. In contrast to other studies, a trend towards a decrease in the natural interest rate is observed for Bulgaria, which provides a more accurate explanation for the structural factors, including underutilized fiscal space (with r*<g) In addition, the nominal rate gap – defined as the spread between the rm and the estimated nominal r* was used as robustness check. The measured nominal rate gap covers a risk premium shift and potentially a large range of other financial (or institutional) factors, but it is still an informative indicator for financial conditions and reveals a strong explanation of private fixed capital expenditures variance in the last two decades.