The Empirical Economics Letters

Volume 5, Number 1, Page 1

January 2006

ISSN 1681 8997


Impacts of Macroeconomic Policies on the Estonian Output: An Application of the Taylor Rule and the IS-MP-AS Model


Yu Hsing *

Professor of Economics, SLU 10813, College of Business

Southeastern Louisiana University, Hammond, LA 70402, U.S.A.


Abstract: Extending the Taylor rule (1993, 1998, 1999) and the IS-MP-AS model (Romer, 2000), this article finds that real output in Estonia is negatively influenced by the expected inflation rate, the government deficit/GDP ratio, the world interest rate and country risk, and positively affected by real depreciation. Policy implications are that fiscal discipline pursued by the Estonian government is appropriate, that depreciation of the kroon to promote net exports would help the Estonian output, and that maintaining a sound fiscal, political and financial environment would reduce country risk and increase investment spending.


Keywords: IS-MP-AS model, Taylor rule, deficit spending, real depreciation, world interest rates, country risk


JEL Classifications: O52, E52, E62


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* Yu Hsing is Department Head and Charles Blackwell Endowed Professor in Economics.