Optimal Exchange Rate and Fiscal Policies for Slovenia on its Way into the Euro Area

This paper analyzes the design of macroeconomic policies for Slovenia on its way into the Euro Area. We simulate different policy scenarios, distinguishing in particular between different exchange rate regimes. For this purpose, we use the model slopol4, a macroeconometric model for Slovenia. We determine ‘optimal’ exchange rate and fiscal policies for Slovenia as solutions of optimum control problems with a quadratic objective function and the model slopol4 as a constraint. Several optimization experiments are carried out under different assumptions under a fixed exchange rate, a flexible exchange rate and a crawling peg regime approximating Slovenia’s entry into the Euro Area. The sensitivity of the results is examined with respect to several assumptions.