Optimal Fiscal Policies after the “Great Recession”: A Case Study for Slovenia

In this paper, we investigate how fiscal policies should look like in a country like Slovenia. Slovenia’s present situation is characterized by high and rapidly increasing public debt and low growth. It is an interesting case because it is one of the few small open economies from Central and Eastern Europe that was already in the Euro Area before the “Great Recession”. Using the SLOPOL model, an econometric model of the Slovenian economy, we analyse the effects of different fiscal policies in Slovenia over the next couple of years by means of simulations. In particular, we determine optimal fiscal policies for Slovenia over the next few years. Using the OPTCON algorithm, we calculate approximately optimal fiscal policies under different scenarios. We show that an optimal design of fiscal policies depends essentially on the political preferences of Slovenian policy makers. Moreover, the simulations and optimizations reveal the small scope of possible alternative fiscal stabilization policies available due to the relatively low effectiveness of the fiscal instruments with respect to their influence on the business cycle in the Slovenian economy. (author's abstract)