Analyzing the Prospects of Estonia Using a Macroeconomic Model

To analyze how Estonia can benefit from further integration with the European Union, we use the macroeconomic model developed at the Bank of Estonia and perform some simulations. The results show that Estonia will benefit much more from an improvement in domestic productive capacities than from a positive external shock on foreign demand. Hence, from the standpoint of joining the European Union, Estonia should continue to implement a policy aimed at promoting investment, which depends crucially on foreign direct investment, which, in turn, also crucially depends on macroeconomic stability. Thus, we emphasize the need to continue a tough fiscal policy in order to maintain the public deficit and to avoid inflationary pressures so that Estonia remains attractive to foreign investors.