Can Shocks to Risk Aversion Explain Business Cycle Fluctuations in Bulgaria (1999–2019)?

Abstract

Stochastic risk aversion is introduced into a dynamic general-equilibrium
setup augmented with government. The theoretical framework is calibrated
to Bulgarian data for the period 1999–2019. The quantitative relevance
of shocks to risk aversion is investigated for the propagation of business
cycles in the Bulgarian economy. More specifically, the presence of
stochastic risk aversion in the theoretical setup improves the fit vis-à-vis
data by increasing variability of employment and decreasing the variability
of investment. However, those improvements are at the expense of lowering
the variability of investment and wages in the model economy.