56. Structural Macroeconomic Model of Slovakia (september 2021)

We estimate a structural econometric model for the Slovak economy that is suitable for both macroeconomic forecasts and simulations. Furthermore, we enrich the model by a fiscal block and make it applicable for a policy analysis. We thus aim to find a trade-off between simplicity and accuracy for forecasting purposes and a detailed structure for a policy analysis. The model is based on error correction equations to incorporate both long-run development of model variables that are consistent with a macroeconomic theory and short-run dynamics of model variables that are estimated from historical data. Next, we present impulse response functions for a set of macroeconomic and fiscal shocks as well as implied fiscal multipliers to evaluate different consolidation scenarios. The most negative outcome results from an increase of capital and labour income taxes that suppress not only actual but also potential output in the domestic economy. On the other hand, the most favourable outcome results from an increase of net consumption taxes in a short horizon and a decline of intermediate consumption in a medium horizon.