Fiscal policy based on output gap leads to economic rollercoaster.
The article examines how the European Commission's method of calculating budget balance may lead to pro-cyclical fiscal policies. By analyzing Finnish data from 1984 to 2014, it shows that using the output gap method tends to result in stimulus during economic upturns and austerity during downturns. Alternative bottom-up methods based on discretionary fiscal measures are found to be more effective in predicting cyclical changes and steering fiscal policy.