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Are Credit Shocks Quantitatively Important for the Propagation of Aggregate Fluctuations in Bulgaria (1999-2018)?
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Journal Article
Are Credit Shocks Quantitatively Important for the Propagation of Aggregate Fluctuations in Bulgaria (1999-2018)?
2021
Overview
We augment an otherwise standard business cycle model with a richer government sector, and add a stochastic costly credit production as in Benk et al. (2005), and a modified Cash in Advance (CIA) consideration. In particular, the cash in advance constraint of Cole (2020) is extended to include private investment and government consumption, and allows an endogenous proportion of total expenditure to be done using credit. This specification is then calibrated to Bulgarian data after the introduction of the currency board (1999-2018). The costly credit production mechanism adds little in explaining business cycle fluctuations. Credit shocks by themselves are an unlikely candidate to drive the business cycle. In addition, the modified CIA constraint produces a transmission mechanism that generates too much investment volatility, and too little variability in hours and wages in the model.
Publisher
IUP Publications
