Fiscal policy based on output gap leads to economic rollercoaster.
The article examines how the European Commission's method of calculating the structural budget balance may lead to pro-cyclical fiscal policies. By analyzing Finnish data from 1984-2014, it shows that the output gap method struggles to predict economic changes accurately in real-time. This can result in policies that worsen economic downturns and amplify upturns. On the other hand, using bottom-up assessment methods based on discretionary fiscal measures could lead to more effective countercyclical policies.