A business cycle model with money-in-utility (MIU) and government sector: the case of Bulgaria (1999–2020)

Abstract

PurposeThe author augments an otherwise standard business cycle model with a richer government sector and adds money-in-utility (MIU) considerations to study economic fluctuations.Design/methodology/approachMore specifically, real money balances enter in a non-separable way with consumption and leisure. This specification is then calibrated to Bulgarian data after the introduction of the currency board (1999–2020) gives a role to money in accentuating economic fluctuations.FindingsThis novel mechanism allows the framework to reproduce – better than the real business cycle (RBC) model – the observed variability and correlations among model variables, and those characterizing the labor market in particular. In addition, money is non-neutral and affects aggregate economic activity.Originality/valueThis is the first micro-founded monetary-DSGE (dynamic stochastic general equilibrium) model on Bulgaria trying to explain the role of money for economic fluctuations.