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Demand Side or Supply Side Stabilization Policies in a Small Euro Area Economy: A Case Study for Slovenia

Author

Listed:
  • Klaus Weyerstrass
  • Reinhard Neck
  • Dmitri Blueschke
  • Boris Majcen
  • Andrej Srakar
  • Miroslav Verbic

Abstract

Preliminary version; not to be quoted without permission of the authors Abstract: In this paper we investigate how effective stabilization policies can be in a small open economy which is part of the Euro Area, namely Slovenia. In particular, we investigate fiscal policy effects on aggregate target variables of the Slovenian economy. Slovenia 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. Simulating the SLOPOL10 model, an econometric model of the Slovenian economy, we analyse the effectiveness of various categories of public spending and of taxes over a time horizon until 2024. Some of these instruments are targeted towards the demand side, while others primarily influence the supply side. Our results show that those public spending measures that entail both demand and supply side effects are more effective in stimulating real GDP and increasing employment than purely demand side measures. Measures that increase research and development and those that improve the education level of the labour force are very effective in stimulating potential and actual GDP. Employment can also be effectively stimulated by cutting the income tax rate and the social security contribution rate, i.e. by reducing the taxwedge on labour income and positively affecting Slovenia's international competitiveness. This shows that fiscal policy measures with a supply side component are much more effective than those that are purely demand side oriented. Keywords: macroeconomics; stabilization policy; fiscal policy; tax policy; public expenditures; demand management; supply side policies; Slovenia; public debt.

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  • Klaus Weyerstrass & Reinhard Neck & Dmitri Blueschke & Boris Majcen & Andrej Srakar & Miroslav Verbic, 2017. "Demand Side or Supply Side Stabilization Policies in a Small Euro Area Economy: A Case Study for Slovenia," EcoMod2017 10608, EcoMod.
    • Handle: RePEc:ekd:010027:10608
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    1. Klaus Weyerstrass & Dmitri Blueschke & Reinhard Neck & Miroslav Verbič, 2023. "Dealing with the COVID-19 pandemic in Slovenia: simulations with a macroeconometric model," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 50(4), pages 853-881, November.

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    More about this item

    Keywords

    Slovenia; Eastern Europe; Tax policy; Public finance and tax issues;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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