Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/243047 
Year of Publication: 
2021
Citation: 
[Journal:] The IUP Journal of Applied Finance [ISSN:] 0972-5105 [Volume:] 27 [Issue:] 3 [Publisher:] IUP Publications [Place:] Hyderabad, Telangana, India [Year:] 2021 [Pages:] 5-20
Publisher: 
IUP Publications, Hyderabad, Telangana, India
Abstract: 
We augment an otherwise standard business cycle model with a richer government sector, and add a stochastic costly credit production as in Benk at al. (2005), and a modified cash in advance (CIA) considerations. In particular, the cash in advance constraint of Cole (2020) is extended to include private investment and government consumption, and allows an endogenous proportion of total expenditure to be done using credit. This specification is then calibrated to Bulgarian data after the introduction of the currency board (1999-2018). The costly credit production mechanism adds little in explaining business cycle fluctuations. Credit shocks by themselves are an unlikely candidate to drive the business cycle. In addition, the modified CIA constraint produces a transmission mechanism that generates too much investment volatility, and too little variability in hours and wages in the model.
Subjects: 
business cycles
modified cash-in-advance (CIA) constraint
stochastic credit production
time cost
Bulgaria
JEL: 
E32
Document Type: 
Article
Document Version: 
Accepted Manuscript (Postprint)
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