Purchasing power parity, which is the simplest exchange rate theory and presupposes, it is important to note, that the real exchange rate is constant over time, states that movements in nominal exchange rates are explained by differences in relative rates of inflation. It turns out, however, that Sweden's higher average rate of inflation in this period compared with the euro area explains only half of the krona's depreciation (Table 1). In other words, purchasing power parity tells us that one euro ought to cost about 6.75 kronor, which is quite a lo ng way from the current SEK/EUR rate. The rest of the krona's depreciation accordingly mirrors a weakening of Sweden's real exchange rate with the euro area, that is, a trend where Swedish goods become cheaper than goods produced in the euro area. The path of the real exchange rate is influenced by a number of so-called fundamental variables. Since the real exchange rate is basically an 'ordinary' relative price, the explanatory variables are, of course, the fundamental conditions for demand and supply in the domestic economy relative to the rest of the world. Relative GDP growth or relative productivity growth are commonly used. The hypothesis is that real exchange rates appreciate in countries where growth and productivity gains are higher than elsewhere. The mechanisms behind this relationship differ somewhat, depending on the model, but it does seem to be supported empirically. This can be summarised by saying that, as Swedish tourists often discover, "Goods are more expensive in rich countries".

In this sense, we, at the BNB, just as we have done so far, will always support an economic policy in Bulgaria that does not threaten long-term economic interests at the cost of achieving quick economic effects – such as the policy of continuing structural reforms, enhancing the efficiency of institutions and improving the general environment for doing business in this country. The BNB traditionally supports conservative fiscal policy owing to which Bulgaria today demonstrates excellent fiscal indicators and given the stable banking system we have reasons to expect that our new issue of euro-denominated Bulgarian global bonds will be well received. We would also welcome efforts at speeding up privatization and active concessioning – inasmuch as they would not only strengthen our country’s fiscal position, but would also improve the long-term competitiveness of the Bulgarian economy. We, however, cannot be indifferent to any ungrounded economic experiments whatsoever. At the same time, the range of working solutions for Bulgaria’s economic prosperity must also take into account the analysis of the comparative advantages of the Bulgarian economy in a global context. In fact, it is exactly the current crisis that has highlighted and provided empirical evidence of the resilience of Bulgaria’s economy. Allow me to recall that before the crisis many argued that the currency board in Bulgaria was restraining the economy’s flexibility and that the high current account deficit (above 1/4 of GDP in 2007) was a dreadful “imbalance” that could in no way be funded in the event of capital flight from the country.