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

Aleksandar Vasilev

Bulgarian Economic Papers from Faculty of Economics and Business Administration, Sofia University St Kliment Ohridski - Bulgaria // Center for Economic Theories and Policies at Sofia University St Kliment Ohridski

Abstract: Financial openness is introduced into a real-business-cycle setup augmented 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 stabilization 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 amplification 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 are 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.

Keywords: business cycles; progressive capital taxation; Bulgaria (search for similar items in EconPapers)
JEL-codes: E24 E32 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2022-04, Revised 2022-04
New Economics Papers: this item is included in nep-cmp, nep-dge, nep-fdg, nep-mac and nep-tra
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Journal Article: A Real-Business-Cycle Model with Financial Liberalization: Lessons for Bulgaria (1999-2020) (2022)
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