Abstract

Stochastic risk aversion is introduced into a dynamic general-equilibrium setup augmented with government. The theoretical framework is calibrated to Bulgarian data for the period 1999-2019. The quantitative relevance of shocks to risk aversion is investigated for the propagation of business cycles in the Bulgarian economy. More specifically, the presence of stochastic risk aversion in the theoretical setup improves the fit vis-`a-vis data by increasing variability of employment and decreasing the variability of investment. However, those improvements are at the expense of lowering the variability of investment and wages in the model economy.