Estimating the output gap for the Maltese economy

An attempt is made in this paper to arrive at an estimate of the output gap for the Maltese economy on a quarterly and annual basis. Two approaches are adopted, namely the Hodrick-Prescott filter and the aggregate production function method, with their results being benchmarked with the results of two other studies. The methods adopted in this paper indicate that the Maltese economy passed through three separate business cycles during the last three decades, with the size of the fluctuations moderating over time. Potential output growth is estimated to have declined significantly during the nineties, as factors of production are growing by a smaller margin. This indicates the importance of carrying out structural reforms that would boost productivity growth.