How Should Credit Gaps Be Measured? An Application to European Countries

By Chikako Baba, Salvatore Dell'Erba, Enrica Detragiache, Olamide Harrison, Aiko Mineshima, Anvar Musayev, Asghar Shahmoradi

January 17, 2020

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Chikako Baba, Salvatore Dell'Erba, Enrica Detragiache, Olamide Harrison, Aiko Mineshima, Anvar Musayev, and Asghar Shahmoradi. How Should Credit Gaps Be Measured? An Application to European Countries, (USA: International Monetary Fund, 2020) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Assessing when credit is excessive is important to understand macro-financial vulnerabilities and guide macroprudential policy. The Basel Credit Gap (BCG) – the deviation of the credit-to-GDP ratio from its long-term trend estimated with a one-sided Hodrick-Prescott (HP) filter—is the indicator preferred by the Basel Committee because of its good performance as an early warning of banking crises. However, for a number of European countries this indicator implausibly suggests that credit should go back to its level at the peak of the boom after the credit cycle turns, resulting in large negative gaps that might delay the activation of macroprudential policies. We explore two different approaches—a multivariate filter based on economic theory and a fundamentals-based panel regression. Each approach has pros and cons, but they both provide a useful complement to the BCG in assessing macro-financial vulnerabilities in Europe.

Subject: Credit, Credit booms, Credit cycles, Credit gaps, Financial sector policy and analysis, Financial services, Money, Real interest rates

Keywords: BCG filter, BCG measure, BCG methodology, BCG's credit data, Countercyclical Capital Buffer, Credit, Credit booms, Credit Cycle, Credit cycles, Credit demand, Credit Gap, Credit gaps, Credit growth, Credit shock, Credit supply factor, Europe, GDP, Global, Macroprudential Policies, Real interest rates, Supply factor, WP

Publication Details

Pages:

41
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/006
Stock No:

WPIEA2020006
ISBN:

9781513525877
ISSN:

1018-5941

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