New method for determining economic equilibrium in small, open economies.
The article explores ways to determine the potential output of small economies like Malta. Traditional methods struggle due to data limitations and economic fluctuations. The authors suggest a new approach using the Hodrick-Prescott filter, which smooths out output gap changes and accounts for long-term deviations from equilibrium. Another suggestion involves integrating structural features into the filter to limit the impact of shocks and allow for extended periods of imbalance.