Abstract

We augment an otherwise standard business cycle model with a richer government sector and add modified cash in advance (CIA) and deposit considerations. In particular, both the cash in advance and deposit constraints of in earlier work are extended to include private investment and government consumption. Also, part of the purchases are made using credit. This specification is then calibrated to Bulgarian data after the introduction of the currency board (1999–2020), gives a role to money and costly credit in accentuating economic fluctuations. In particular, the modified CIA constraint combines monetary with banking theory, and thus produces a novel mechanism that allows the framework to reproduce better observed variability and correlations among model variables, and those characterising the labour market in particular.