Fiscal Multipliers in the Slovak Economy: A DSGE Simulation

In order to calculate fiscal multipliers for Slovakia, I use a small open DSGE model of Slovakia constructed by Zeman and Senaj (2009) that is augmented by a more sophisticated fiscal sector, which comprises government expenditure components (consumption, investment and social transfers to liquidity-constrained households), as well as government revenue components (personal income taxes, employer social contributions, VAT (value-added tax) and a lump-sum tax). The Slovak government has laid out a plan of public finance consolidation for the period from 2013 to 2017 in order to meet the Fiscal Compact criteria. According to the fiscal multipliers calculated in this paper, the consolidation will cause an aggregate loss of 3.1% of GDP during this period, which turns out to be a more precise estimate than official government projections.