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Abstract

In this paper we investigate the quantitative importance of efficiency wages of no-shirking type in explaining business cycle fluctuations in Bulgarian labor markets. This is done by augmenting a relatively standard real business cycle model with unobservable workers effort by employers and efficiency wage contracts, as well as through the inclusion of a detailed government sector. This imperfection in labor markets introduces a strong internal transmission mechanism that allows the model framework to capture the business cycles in Bulgarian data better than earlier models, and setups assuming perfectly-competitive labor markets in particular.
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Abstract

We introduce consumption habits into a real-business-cycle setup augmented with a detailed government sector. We calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2018). We investigate the quantitative importance of the presence of internal consumption habits motive for the propagation cyclical fluctuations in Bulgaria. Allowing for internal habits in household’s consumption improves the model performance against data, and in addition this extended setup dominates the standard RBC model framework without habits. Therefore, the computational experiments performed in this paper suggest that habits are a quantitatively important model ingredient, which should be taken into consideration when analysing the effects of different policies in Bulgaria. This result can be viewed as an empirical validation of the habit model, and a rejection of the model without habits in the case of Bulgaria. In addition, we also demonstrate that internal habits are quantitatively more important than external habits for the Bulgarian business cycle.
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