Towards the Development of an Overheating Identification Framework : The Case of Slovenia

The high costs associated with financial crises highlight the need of early identification of vulnerabilities’ build up, while the policy makers can effectively implement preventive measures. This study develops a framework that provides such information about the status of the Slovenian economy and in particular issue a warning when it follows an excessively expansionary path. The method used is the univariate signaling approach given its transparency and applicability in data constrained environments. The results from the empirical application indicate that the Slovenian economy is not in a state of overheating for the time being. However, constant monitoring is appropriate because it will give sufficient reaction time to policy makers in case prevailing conditions change