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An RBC model with Epstein-Zin (non-expected-utility) recursive preferences: lessons from Bulgaria (1999-2018)

Author

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  • Aleksandar Vasilev

    (Lincoln International Business School, UK)

Abstract

We introduce Epstein-Zin (1989, 1991) preferences into a real-business-cycle setup augmented with a detailed 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 presence of Óearly resolution of uncertaintyÓ motive for the propagation of cyclical fluctuations in Bulgaria. Al- lowing for Epstein-Zin preferences improves the model performance against data, and in addition this extended setup dominates the standard RBC model framework, e.g., Vasilev (2009).

Suggested Citation

  • Aleksandar Vasilev, 2020. "An RBC model with Epstein-Zin (non-expected-utility) recursive preferences: lessons from Bulgaria (1999-2018)," Bulgarian Economic Papers bep-2020-01, Faculty of Economics and Business Administration, Sofia University St Kliment Ohridski - Bulgaria // Center for Economic Theories and Policies at Sofia University St Kliment Ohridski, revised Jan 2020.
    • Handle: RePEc:sko:wpaper:bep-2020-01
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    References listed on IDEAS

    as
    1. van Binsbergen, Jules H. & Fernández-Villaverde, Jesús & Koijen, Ralph S.J. & Rubio-Ramírez, Juan, 2012. "The term structure of interest rates in a DSGE model with recursive preferences," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 634-648.
    2. Glenn D. Rudebusch & Eric T. Swanson, 2012. "The Bond Premium in a DSGE Model with Long-Run Real and Nominal Risks," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 105-143, January.
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    4. Francois Gourio, 2012. "Disaster Risk and Business Cycles," American Economic Review, American Economic Association, vol. 102(6), pages 2734-2766, October.
    5. Philippe Weil, 1990. "Nonexpected Utility in Macroeconomics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 29-42.
    6. Aleksandar Vasilev, 2020. "Search and Matching Frictions and Business Cycle Fluctuations in Bulgaria," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 19(3), pages 319-340, December.
    7. Larry G. Epstein & Stanley E. Zin, 2013. "Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 12, pages 207-239, World Scientific Publishing Co. Pte. Ltd..
    8. Aleksandar Zdravkov Vasilev, 2009. "Business cycles in Bulgaria and the Baltic countries: an RBC approach," International Journal of Computational Economics and Econometrics, Inderscience Enterprises Ltd, vol. 1(2), pages 148-170.
    9. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-357, April.
    10. Martin Andreasen, 2012. "On the Effects of Rare Disasters and Uncertainty Shocks for Risk Premia in Non-Linear DSGE Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(3), pages 295-316, July.
    11. Vasilev, Aleksandar, 2017. "A Real-Business-Cycle model with efficiency wages and a government sector: the case of Bulgaria," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, issue 4, pages 359-377.
    12. Georg Kaltenbrunner & Lars A. Lochstoer, 2010. "Long-Run Risk through Consumption Smoothing," The Review of Financial Studies, Society for Financial Studies, vol. 23(8), pages 3190-3224, August.
    13. Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 263-286, April.
    14. Aleksandar Vasilev, 2017. "A Real-Business-Cycle Model with Reciprocity in Labor Relations and Fiscal Policy: The Case of Bulgaria," Bulgarian Economic Papers bep-2017-03, Faculty of Economics and Business Administration, Sofia University St Kliment Ohridski - Bulgaria // Center for Economic Theories and Policies at Sofia University St Kliment Ohridski, revised Mar 2017.
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    16. Vasilev, Aleksandar, 2015. "Modeling Real Private Consumption Expenditure in Bulgaria after the Currency Board Implementation (1997-2005)," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 18(1), pages 81-89.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Business fluctuations; Epstein-Zin preferences; Bulgaria.;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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