Are Firing Costs Important for Business Cycles? Lessons from Bulgaria (1999–2018)

Abstract

We introduce firing costs 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 importance of such labour market frictions
for cyclical fluctuations in Bulgaria. Firing costs decrease employment
volatility and pro-cyclicality, where both effects come at odds with
data. Besides those, we do not find other important effects of firing costs
for business cycle fluctuations in Bulgaria.