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Does the Structural Budget Balance Guide Fiscal Policy Pro-Cyclically? Evidence from the Finnish Great Depression of the 1990s

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  • Tero Kuusi

Abstract

In this article, I evaluate the challenges related to the European Commission's output gap method of calculating the structural budgetary position, and assess its bottom-up alternatives in the EU's fiscal framework using the Finnish data for the years 1984–2014. The results reinforce the impression of the limited capacity of the output gap method to predict cyclical changes in real time and suggest that using the output gap method to steer fiscal policy tends to lead to a procyclical policy (stimulus in upturns and austerity in downturns). The bottom-up assessment methods that are based on discretionary fiscal policy measures appear to work better, and using them to steer fiscal policy could make the policy more effective.

Suggested Citation

  • Tero Kuusi, 2017. "Does the Structural Budget Balance Guide Fiscal Policy Pro-Cyclically? Evidence from the Finnish Great Depression of the 1990s," National Institute Economic Review, National Institute of Economic and Social Research, vol. 239(1), pages 14-31, February.
    • Handle: RePEc:sae:niesru:v:239:y:2017:i:1:p:r14-r31
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    Cited by:

    1. Antonio Fatás, 2019. "Fiscal Policy, Potential Output, and the Shifting Goalposts," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(3), pages 684-702, September.

    More about this item

    Keywords

    Structural budget balance; Output gap; Fiscal stance; Discretionary fiscal effort;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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