Abstract

This paper explores the business cycle in Bulgaria and the Baltic
countries: Estonia, Latvia and Lithuania during the 1993–2005 period. The
paper aims at deepening the understanding of the nature of output fluctuations.
The neoclassical approach will be employed, much in the spirit of the real
business cycle (RBC) literature, which gives a general equilibrium picture of
the transition process. The model used in this paper follows the methodology of
King et al. (1988). Both the model and data series show that the major drop in
output was due to productivity. In addition, the timing of the banking reforms
coincides with the improvement of economic performance. This is a strong
indication that banking regulations in place were crucial for the output
performance throughout the period in Bulgaria and the Baltic countries, a
finding that has important implications for economic policy.