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.

Keywords

• business cycles
• non-ricardian households
• hand-to-mouth
• myopic behavior
• bulgaria
• e24
• e32