Are Habits in Consumption Important for the Propagation of Business Cycle Fluctuations in Bulgaria

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.