# On the Relationship Between Private Capital Flows to Emerging Europe and the Design of Optimal Fiscal Policies: The Case of Croatia

Doris A. Behrens^{*}

Based on the analysis of a macroeconometric model, mapping the Croatian economy with the econometric fitting procedure being based on quarterly data from 1999q1 to 2012q4, we will seek for optimal fiscal policies affecting significant economic key variables (like growth, inflation, unemployment, etc.). The model CROPOL 2 consists of a set of both behavioral equations and identities, and combines Keynesian and neoclassical features. The Keynesian elements of the model determine the short-run development assuming that the economy is demand driven and persistent disequilibria in the market for goods and services and especially on the labor market are possible. The modeled supply side of Croatiaâ€™s economy is built on neoclassical foundations. \newline By utilizing the OPTCON algorithm we will evaluate past (actual) fiscal policies implemented to fight the aftermath of the financial and global crisis of 2008 and find optimal policies targeting a hypothetical recession/boom in the future. For the latter, alternative scenarios are assumed pertaining to fluctuations in the volume of world trade, the level of the oil price, and the short-term interest rate within the Euro area. Emanating from the empirical findings of Atoyan et al. (2012) we test for the relationship between private capital flows to Croatia and the layout of optimal fiscal policy. In particular, for the scenarios mentioned above we will show to what extent countercyclical fiscal policies can enhance an increased investor confidence in the Croatian economy that may translate into increased investment activities attracting financial capital from abroad, eventually fueling economic growth. \begin{thebibliography}{99} \bibitem{Atoyan} R.Atoyan, A.Jaeger, D.Smith, {\em The pre-crisis capital flow surge to emerging Europe: Did countercyclical fiscal policy make a difference?}, Working Paper No. 12/222, International Monetary Fund, 2012. \end{thebibliography}

Mathematics Subject Classification: 91B64 62P20

Keywords: Macroeconomic model; optimal control; fiscal policy; capital flows; Croatia

Minisymposion: Computational Optimization Methods in Statistics, Econometrics and Finance