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How can the preferences of policy makers be operationalised in optimum control problems with macroeconometric models? A case study for Slovenian fiscal policies

Author

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  • Dmitri Blueschke

    (Department of Economics, Alpen-Adria-Universität Klagenfurt, Klagenfurt, Austria)

  • Klaus Weyerstrass

    (Macroeconomics and Business Cycles Group, Institute for Advanced Studies, Vienna, Austria)

  • Reinhard Neck

    (Department of Economics, Alpen-Adria-Universität Klagenfurt, Klagenfurt, Austria)

Abstract

In this paper, we use the results of a survey among Slovenian politicians in order to design an objective function for an optimal control problem with a macroeconometric model for fiscal policy in Slovenia that takes account of policy makers’ preferences. The paper discusses three different scenarios in which the policy preferences revealed in interviews can be included in the objective functions of the control problems. These objective functions are then used to calculate optimal fiscal policies for the Slovenian economy until 2030. For this purpose, we utilise the macroeconometric model SLOPOL10 and the OPTCON2 algorithm. The results indicate qualitatively similar behaviour of the optimised dynamic system and a better performance (lower values of the loss due to deviation from “ideal” paths) from a ranking-based approach than from an ad-hoc assumption of policy makers’ preferences. We sketch how to integrate the approach in a decision-support system for macroeconomic policy design.

Suggested Citation

  • 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.
    • Handle: RePEc:ipf:psejou:v:48:y:2024:i:2:p:151-169
    DOI: 10.3326/pse.48.2.2
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    References listed on IDEAS

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    1. 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.
    2. Blueschke-Nikolaeva, V. & Blueschke, D. & Neck, R., 2012. "Optimal control of nonlinear dynamic econometric models: An algorithm and an application," Computational Statistics & Data Analysis, Elsevier, vol. 56(11), pages 3230-3240.
    3. Alvaro Aguiar & Manuel Martins, 2008. "Testing for asymmetries in the preferences of the euro-area monetary policymaker," Applied Economics, Taylor & Francis Journals, vol. 40(13), pages 1651-1667.
    4. Dmitri Blueschke & Klaus Weyerstrass & Reinhard Neck, 2016. "How Should Slovenia Design Fiscal Policies in the Government Debt Crisis?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(7), pages 1562-1573, July.
    5. Stefan Krause & Fabio Méndez, 2005. "Policy Makers' Preferences, Party Ideology, and the Political Business Cycle," Southern Economic Journal, John Wiley & Sons, vol. 71(4), pages 752-767, April.
    6. Reinhard Neck & Dmitri Blueschke & Klaus Weyerstrass, 2011. "Optimal macroeconomic policies in a financial and economic crisis: a case study for Slovenia," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 38(3), pages 435-459, July.
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    10. Johansen, Leif, 1974. "Establishing preference functions for macroeconomic decision models : Some observations on Ragnar Frisch's contributions," European Economic Review, Elsevier, vol. 5(1), pages 41-66, June.
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    More about this item

    JEL classification:

    • 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
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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