A Real-Business-Cycle Model with GHH-preferences: Lessons for Bulgaria (1999-2019)

Preferences a la Greenwood, Hercowitz and Huffmann (1988) are introduced into areal-business-cycle setup augmented with government. The model is calibrated to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2019). The importance of the absence of wealth effect in the GHH utility function is investigated. The quantitative effect of such preferences is found to slightlydecrease consumption and investment volatility, which is a step in the right direction, but also decreases the variability of hours and wages relative to the standard logarithmic utility; overall, the effect is rather small though.