Impact of Fiscal Measures in Response to the COVID-19 Pandemic on Small-Open Economies: Lessons from Slovenia

Abstract

We estimate the impact of the fiscal expansion in response to the COVID-19 outbreak on the Slovene economy via a twofold approach. First, we simulate fiscal shocks in a three-scenario setup using a calibrated large-scale DSGE model. Second, we employ a small-scale VAR model to check the robustness of the theoretical results. The findings suggest a significant response of GDP, private consumption, and imports to fiscal shocks. In particular, the outcomes highlight that a government consumption shock explains the lion’s share of domestic fluctuations, compared to other unanticipated fiscal developments. The main transmission channel is high complementarity between private and government consumption.

Keywords: Fiscal shocks, Fiscal multipliers, DSGE model, VAR model

JEL Classification: C32, E32, E62