Towards an Objective Function for Slovenian Fiscal Policy-making: A Heuristic Approach" Klaus Weyerstrass and Reinhard Neck University of Klagenfurt, A-9020 Klagenfurt, Austria Abstract. In this paper, we use an optimum control approach to con- struct an objective function for Slovenian fiscal policy-making. At first, a quadratic objective function with variables that might be of interest to a policy-maker is optimized subject to the econometric model SLOPOLI of the Slovenian economy. Next, optimization with variations of parame- ters of the objective function is performed. These variations concern the weights and values of the target variables, the discount factor, and the planning horizon. The aim is to obtain an objective function that comes as close as possible to the preferences of fiscal policy-makers in Slovenia, so as to develop a decision support system for economic policy-makers for this country. Keywords: Econometric modeling, forecasting and simulation, optimal control, policy objectives, fiscal policy. 1 Introduction In the first years after having gained independence from former Yugoslavia in 1991, the main concern of Slovenian monetary and fiscal policy was to reduce the high inflation and to overcome the economic recession with declining real GDP and increasing unemployment. As inflation has reached one-digit figures and real GDP has been growing for several years, economic policy in Slovenia now aims at approaching GDP per capita comparable to the average of the European Union, because the ultimate goal of Slovenian policy is the membership of the * The work described in this paper was initiated within the framework of the con- tract "Integriert es Energieprogramm - Makrookonomisches Modell fiir Slowenien (Austrian-Slovenian Co-operation for an Integrated Energy Program - Development and Implementation of a Macroeconomic Model)" between the Slovenian Ministry of Economic Affairs and Verbundplan GmbH , financed by the Austrian Federal Chan- cellery (Bundeskanzleramt). The authors are indebted to Tanja Cesen and Igor Strm- snik , Institute of Macroeconomic Analysis and Development (IMAD), Ljubljana, for providing the data, to Gottfried Haber, University of Klagenfurt, for adaptations of the algorithm OPTCON and for assistance in conducting the research for this pa- per, and to Christina Kopetzky for editing the paper in 'lEX. The present research has been supported by the Austrian Science Foundation (FWF) under contract no. P12745-0EK and by the Ludwig Boltzmann Institute for Economic Analysis, Vi- enna. A. S. Tangian et al. (eds.), Constructing and Applying Objective Functions © Springer-Verlag Berlin Heidelberg 2002