A monetary business-cycle model with an augmented cash-inadvance constraint, investment tax credit and a government sector: the case of Bulgaria (1999-2022)
Abstract
We modify an otherwise standard business cycle model with a richer government sector, and add an augmented cash-in-advance (CIA) considerations. In particular, the cash in advance constraint of Cole (2020) is extended to include private investment and government consumption, and allows a proportion of total expenditure to be done using credit. Additionally, we allow for the presence of an investment subsidy (“investment tax credit”). This specification is then calibrated to Bulgarian data after the introduction of the currency board (1999-2022), gives a role to money in accentuating economic fluctuations. In particular, the modified CIA constraint pro- duces a mechanism that allows the framework to reproduce better observed variability and correlations among model variables, and those characterizing the labor market in particular.
References
[2]. Cogley, T. and J.M. Nason (1995) “Output dynamics in Real-Business-Cycles," American Economic Review 85(3): 492-511.
[3]. Cole, H. (2020) Monetary and Fiscal Policy through a DSGE Lens. Oxford University Press: Oxford, UK.
[4]. Hansen, G. (1985) “Indivisible labor and the business cycle." Journal of Monetary Economics, Vol. 16, pp. 309-327.
[5]. Hodrick, R.J. and E.C. Prescott (1980) “Post-war US business cycles: An empirical investigation." Unpublished manuscript (Carnegie-Mellon University, Pittsburgh, PA).
[6]. National Statistical Institute (2022) NSI Statistical Database. Available on-line at www.nsi.bg. Last accessed on Sept. 18, 2022.
[7]. Nelson, C. R. and C.I. Plosser (1982) “Trends and Random Walks in Macroeconomic Time Series," Journal of Monetary Economics, 10(2): 139-62.
[8]. Rogerson, R. (1988) “Indivisible labor, lotteries and equilibrium." Journal of Monetary Economics, Vol. 21, pp. 316.
[9]. Rotemberg, J. and M. Woodford (1996) “Real-Business-Cycle Models and the Forecastable Movements in Output, Hours, and Consumption," American Economic Review, 86: 71-89.
[10]. Vasilev, A.Z. (2017a) “VAT Evasion in Bulgaria: A General-Equilibrium Approach," Review of Economics and Institutions, Vol. 8, No.2, pp. 2-17.
[11]. Vasilev, A.Z. (2017b) “A Real-Business-Cycle model with efficiency wages and a government sector: the case of Bulgaria," Central European Journal of Economic Modelling and Econometrics, Vol. 9, Issue 4, pp. 359-377.
[12]. Vasilev, A. Z. (2017c) “Business Cycle Accounting: Bulgaria after the introduction of the currency board arrangement (1999-2014)", European Journal of Comparative Economics, vol.14, No.2, pp. 197-219.
[13]. Vasilev, A. (2017d) “A Real-Business-Cycle model with reciprocity in labor relations and fiscal policy: the case of Bulgaria," Journal of Economics and Econometrics 61 (2): 47-76.
[14]. Vasilev, A. (2016) “Search and matching frictions and business cycle fluctuations in Bulgaria," Bulgarian Economic Papers BEP 03-2016, Center for Economic Theories and Policies, Sofia University St. Kliment Ohridski, Faculty of Economics and Business Administration, Sofia, Bulgaria.
[15]. Vasilev, A. (2015) “Welfare effects of flat income tax reform: the case of Bulgaria," Eastern European Economics 53(2): 205-220.
[16]. Vasilev, A. (2009) “Business cycles in Bulgaria and the Baltic countries: an RBC approach," International Journal of Computational Economics and Econometrics 1(2): 148-170.
The Copyright Transfer Form to ASERS Publishing (The Publisher)
This form refers to the manuscript, which an author(s) was accepted for publication and was signed by all the authors.
The undersigned Author(s) of the above-mentioned Paper here transfer any and all copyright-rights in and to The Paper to The Publisher. The Author(s) warrants that The Paper is based on their original work and that the undersigned has the power and authority to make and execute this assignment. It is the author's responsibility to obtain written permission to quote material that has been previously published in any form. The Publisher recognizes the retained rights noted below and grants to the above authors and employers for whom the work performed royalty-free permission to reuse their materials below. Authors may reuse all or portions of the above Paper in other works, excepting the publication of the paper in the same form. Authors may reproduce or authorize others to reproduce the above Paper for the Author's personal use or for internal company use, provided that the source and The Publisher copyright notice are mentioned, that the copies are not used in any way that implies The Publisher endorsement of a product or service of an employer, and that the copies are not offered for sale as such. Authors are permitted to grant third party requests for reprinting, republishing or other types of reuse. The Authors may make limited distribution of all or portions of the above Paper prior to publication if they inform The Publisher of the nature and extent of such limited distribution prior there to. Authors retain all proprietary rights in any process, procedure, or article of manufacture described in The Paper. This agreement becomes null and void if and only if the above paper is not accepted and published by The Publisher, or is with drawn by the author(s) before acceptance by the Publisher.