Macroeconomic Policies for Slovenia after the “Great Recession”

Abstract

The paper analyses the effects of different global developments and the resulting reactions of fiscal policies after the “Great Recession” on the Slovenian economy. We use the macro model SLOPOL8.1, an econometric model of the Slovenian economy, to simulate the effects of different scenarios for the global economy under the assumption of “no-policy” reactions, i.e. assuming that macroeconomic policies are conducted without attempting to deal with the effects of the world economy. Moreover, we investigate how fiscal policy should react under each scenario if it aims at minimizing some intertemporal objective function containing important macroeconomic policy targets as arguments. It turns out that the development of the Slovenian economy depends strongly on world business cycles. If another crisis follows the “Great Recession”, a highly expansionary design of fiscal policies is required in order to achieve reasonable rates of growth or levels of output, which is neither realistic nor sustainable. There are strong trade-offs between countercyclical fiscal policies and the requirements of fiscal solvency. Although acceptable fiscal policies have to be mildly countercyclical, they are not able to protect the Slovenian economy from the negative effects of another slump such as the one occurring during the “Great Recession”.