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

This paper analyzes the design of macroeconomic policies for Sloveniaon 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 macroeconometricmodel for Slovenia. We determine ‘optimal’ exchange rate and fiscalpolicies for Slovenia as solutions of optimum control problems with aquadratic objective function and the model slopol4 as a constraint.Several optimization experiments are carried out under different assumptionsunder a fixed exchange rate, a flexible exchange rate and acrawling peg regime approximating Slovenia’s entry into the Euro Area.The sensitivity of the results is examined with respect to several assumptions.