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Demand-side or supply-side stabilisation policies in a small euro area economy: a case study for Slovenia

Author

Listed:
  • Reinhard Neck

    (Alpen-Adria-Universität Klagenfurt)

  • Klaus Weyerstrass

    (Institute for Advanced Studies, Macroeconomics and Public Finance Group)

  • Dmitri Blueschke

    (Alpen-Adria-Universität Klagenfurt)

  • Miroslav Verbič

    (University of Ljubljana, & Institute for Economic Research)

Abstract

In this paper we analyse the effectiveness of demand- and supply-side fiscal policies in the small open economy of Slovenia. Simulating the SLOPOL10 model, an econometric model of the Slovenian economy, we analyse the effectiveness of various categories of public spending and taxes during the period 2020 to 2030, assuming that no crisis occurs. Our simulations show that those public spending measures that entail both demand- and supply-side effects are more effective at stimulating real GDP and increasing employment than pure demand-side measures. This is due to the fact that supply-side measures also increase potential and not only actual GDP. Measures which foster research and development and those which improve the education level of the labour force are particularly effective in this respect. Employment can also be stimulated effectively by cutting the income tax rate and the social security contribution rate, i.e. by reducing the tax wedge on labour income, which positively affects Slovenia’s international competitiveness. Successful stabilisation policies should thus contain a supply-side component in addition to a demand-side component. We also provide a first simulation of potential effects of the Covid-19 crisis on the Slovenian economy, which is modelled as a combined demand and supply shock.

Suggested Citation

  • Reinhard Neck & Klaus Weyerstrass & Dmitri Blueschke & Miroslav Verbič, 2021. "Demand-side or supply-side stabilisation policies in a small euro area economy: a case study for Slovenia," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 48(3), pages 593-610, August.
    • Handle: RePEc:kap:empiri:v:48:y:2021:i:3:d:10.1007_s10663-021-09503-y
    DOI: 10.1007/s10663-021-09503-y
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    Cited by:

    1. Dmitri Blueschke & Klaus Weyerstrass & Reinhard Neck, 2024. "How can the preferences of policy makers be operationalised in optimum control problems with macroeconometric models? A case study for Slovenian fiscal policies," Public Sector Economics, Institute of Public Finance, vol. 48(2), pages 151-169.
    2. 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

    Macroeconomics; Stabilisation policy; Fiscal policy; Tax policy; Public expenditure; Demand management; Supply-side policies; Slovenia; Public debt;
    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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