[Journal:] Central European Journal of Economic Modelling and Econometrics [ISSN:] 2080-119X [Issue:] forthcoming
We introduce consumption habits into a real-business-cycle setup augmented with a detailed government sector. We calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2018). We investigate the quantitative importance of the presence of internal consumption habits motive for the propagation cyclical fluctuations in Bulgaria. Allowing for internal habits in household's consumption improves the model performance against data, and in addition this extended setup dominates the standard RBC model framework without habits. Therefore, the computational experiments performed in this paper suggest that habits are a quantitatively important model ingredient, which should be taken into consideration when analyzing the effects of different policies in Bulgaria. In addition, we also demonstrate that internal habits are quantitatively more important than external habits for the Bulgarian business cycle.
Business fluctuations Bulgaria internal consumption habits