Abstract

We introduce investment-specific technological change (ISTC) into an otherwise standard real-business-cycle setup with a government sector. We calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999–2018). We then investigate the quantitative importance of the ISTC process in such a model for cyclical fluctuations in Bulgaria, and compare the results to a setup where cycles are driven by shocks to total factor productivity. We find that the model with ISTC shocks matches Bulgarian data better than the standard model driven by changes to total factor productivity only. The ISTC process is thus a better candidate for a a ”technology shock generation process,” at least in Bulgaria since the 2000s.