Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/213557 
Year of Publication: 
2019
Series/Report no.: 
EERI Research Paper Series No. 08/2019
Publisher: 
Economics and Econometrics Research Institute (EERI), Brussels
Abstract: 
We introduce consumption habits into an exogenous growth model augmented with a detailed government sector, and calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2016). We show that in contrast to the case without habits, e.g., Vasilev (2009), when the economy features saddle-path stability, the habit motive alone leads to equilibrium indeterminacy in the model. When habits enter multiplicatively in the representative agent's utility function, the setup exhibits "sink" dynamics, and equilibrium paths are determined by "animal spirits". These results are in line with the findings in the literature, e.g., Benhabib and Farmer (1994, 1996) and Farmer (1999), and have major implications for polcy-making and welfare.
Subjects: 
Equilibrium indeterminacy
animal spirits
multiplicative consumption habits
Bulgaria
JEL: 
E32
E22
E37
Document Type: 
Working Paper

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