Can shocks to the discount factor explain business cycle fluctuations in Bulgaria (1999–2018)?

<p>A stochastic discount factor is introduced into a real-business-cycle setup with a governmentsector. The model is calibrated to Bulgarian data for the period 1999–2018, which is after the introductionof the currency board arrangement. The quantitative importance of shocks to the discount factor isinvestigated for the propagation of cyclical fluctuations in Bulgaria. In particular, allowing for astochastic discount factor in the setup improves the model fit vis-a-vis data by increasing variability ofemployment and wages. However, those improvements are at the cost of increasing the volatility ofconsumption and investment.</p>