Indicators of the Cyclically Adjusted Budget Balance

Abstract

Brunila and Tujula suggest that estimating output gaps using a production function may be preferable in the presence of large structural breaks in the economy. In the Finnish experience, they show that the qualitative conclusions are not overly sensitive to the choice of method (HP filter or production function approach) until the early 1990s. As major structural breaks occurred in the Finnish economy in the late 1980s and early 1990s, the divergences between the results of the two methods became large. The authors tend to support the indications provided by the production function approach, suggesting that it can more readily incorporate auxiliary information concerning structural change.