An RBC model with non-Ricardian households: lessons for Bulgaria (1999–2018)

Abstract:

Purpose
The authors introduce non-Ricardian (“hand-to-mouth”) myopic agents into an otherwise standard real-business-cycle (RBC) setup augmented with a detailed government sector. The authors investigate the quantitative importance of the presence of nonoptimizing households for cyclical fluctuations in Bulgaria.

Design/methodology/approach
The authors calibrate the RBC model to Bulgarian data for the period following the introduction of the currency board arrangement (1999–2018).

Findings
The authors find that the inclusion of such non-Ricardian households improves model performance along several dimensions and generally provides a better match vis-a-vis data, as compared to the standard model populated with Ricardian agents only.

Originality/value
This is a novel finding in the macroeconomic studies on Bulgaria using modern quantitative methods.