Abstract

We introduce an endogenous discount factor as in Uzawa (1968) and Schmitt-Grohe and Uribe (2003) into a real-business-cycle setup with government sector and Greenwood et al. (1988) preferences. We calibrate the artificial economy to Bulgarian data for the period after the currency board arrangement was introduced (1999-2018). In particular, we look into the quantitative importance of endogenous discounting for the propagation of cyclical fluctuations in Bulgaria. We conclude that the presence of an endogenous discount factor improves the model, and that the extended setup performs better than the standard RBC model framework with a constant discount factor (e.g. Vasilev, 2009).