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

Aleksandar Vasilev

doi:10.1108/jed-06-2020-0077

Abstract

PurposeThe 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/approachThe authors calibrate the RBC model to Bulgarian data for the period following the introduction of the currency board arrangement (1999–2018).FindingsThe 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/valueThis is a novel finding in the macroeconomic studies on Bulgaria using modern quantitative methods.

Highlights

Introduction and motivationOne of the postulates of the real-business-cycle (RBC) theory is that household are rational, forward-looking individuals who make dynamically optimal decisions in the face of uncertainty
In the standard RBC model, saving takes place in the form of investment in capital accumulation, and the possession of more physical capital generates a higher income in the future
We calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999–2018)

Summary

Firm problem

There is a representative firm in the economy, which produces a homogeneous product. The price of output is normalized to unity. The production technology is Cobb–Douglas and uses both physical capital, kft and labor hours, hft , to maximize static profit. Where At denotes the level of technology in period t. Since the firm rents the capital from households, the problem of the firm is a sequence of static profit maximizing problems. There are no profits, and each input is priced according to its marginal product, i.e.: kt α yt kft rt ;. Given that the inputs of production are paid their marginal products, Πt 1⁄4 πit 1⁄4 0; ∀t

Government

Method

Conclusions