A Real-Business-Cycle Model with Financial Liberalization: Lessons for Bulgaria (1999-2020)

Abstract


 
 
 Financial openness is introduced into a real-business-cycle setup aug- mented with a detailed government sector. The model is calibrated to Bulgarian data for the period following the introduction of the currency board arrangement (1999- 2020). The quantitative importance of financial openness is investigated for the stabi- lization of cyclical fluctuations in Bulgaria. The computational experiment performed in this paper reveals that greater financial openness increases the impact of technology shocks on output, investment, consumption, labor hours, and net exports. This am- plification effect is due to the following mechanism: openness provides a cheap access to foreign funds. Unfortunately, the new results come at odds with a major empirical observation, i.e. that consumption and net exports strongly pro-cyclical; the model, however, produces a countercyclical consumption, as well as net exports. Thus, such a setup is not yet ready to be used for policy analysis.
 
 

A Progressive Consumption Tax: An Important Instrument for Stabilizing Business Cycles, or Just an Exotic Idea?

“…Next, the relative weight attached to the utility out of leisure in the household's utility function, γ, is calibrated to match that in steady-state consumers would supply one-third of their time endowment to working. This is in line with the estimates for Bulgaria (Vasilev 2017a) as well over the period studied. Net, the steady-state depreciation rate of physical capital in Bulgaria, δ = 0.013, was taken from Vasilev (2016).…”