Abstract

We allow for an endogenous depreciation rate of physical capital stock into a real-
business-cycle model 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 investigate the quantitative importance of the endogenous depreciation rate,
and indirectly, the capital utilization mechanism for cyclical fluctuations in Bulgaria.
Allowing for endogenous variations in the depreciation rate of capital improves the
model performance against data, and in addition this extended setup dominates the
standard RBC model framework with constant depreciation and a fixed utilization rate
of physical capital, and a fixed depreciation rate e.g., Vasilev (2009).