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.