Weighing up the Credit-to-GDP Gap: A Cautionary Note

It has been argued that credit-to-GDP gaps (credit gap) are useful early warning indicators for banking crises. In addition, the Basel Committee on Banking Supervision has also advocated using these gaps - estimated using a one-sided Hodrick-Prescott filter with a smoothing parameter of 400,000 - to...

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Veröffentlicht in:MAGKS - Joint Discussion Paper Series in Economics (Band 22-2020)
Autoren: Karagedikli, Özer, Rummel, Ole
Format: Artikel
Sprache:Englisch
Veröffentlicht: Philipps-Universität Marburg 2020
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Zusammenfassung:It has been argued that credit-to-GDP gaps (credit gap) are useful early warning indicators for banking crises. In addition, the Basel Committee on Banking Supervision has also advocated using these gaps - estimated using a one-sided Hodrick-Prescott filter with a smoothing parameter of 400,000 - to inform policy on the appropriate counter-cyclical capital buffer. We use the weighted average representation of the same filter and show that it attaches high weights to observations from the past, including the distant past: up to 40 lags (10 years) of past data are used in the calculation of the one-sided trend/permanent component of the credit-to-GDP ratio. We show how past data that belongs to the ‘old-regime’ prior to the crises continue to influence the estimates of the trend for years to come. By using narrative evidence from a number of countries that experienced deep financial crises, we show that this leads to some undesirable influence on the trend estimates that is at odds with the post-crisis environment.
Umfang:22 Seiten
ISSN:1867-3678
DOI:10.17192/es2024.0649