Early Warning Performance of Univariate Credit-to-GDP Gaps

Zsuzsanna Hosszu () and Gergely Lakos ()
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Zsuzsanna Hosszu: Magyar Nemzeti Bank (Central Bank of Hungary)
Gergely Lakos: Magyar Nemzeti Bank (Central Bank of Hungary)

No 2022/142, MNB Occasional Papers from Magyar Nemzeti Bank (Central Bank of Hungary)

Abstract: We use European and simulated Hungarian data to search for the univariate one-sided credit-to-GDP gap that predicts systemic banking crises most accurately. The credit-to-GDP gaps under review are optimized along four dimensions: (1) definition of outstanding credit, (2) forecasting method for extending credit-to-GDP time series, (3) filtering method and (4) maximum cycle length. Based on European data, we demonstrate that credit-to-GDP gaps calculated with narrow definition of outstanding credit and up to 1-year forecasts of credit-to-GDP outperform other specifications significantly and robustly. Regarding the other two dimensions, the Hodrick–Prescott filter with long cycles (popular in regulatory practice), the Christiano–Fitzgerald filter with medium-term cycles and the wavelet filter with short cycles prove to be the best. All three should be applied to credit-to-GDP time series calculated with narrow credit, and with no credit-to-GDP forecast, except the wavelet filter with short-term forecast. Credit-to-GDP gaps with most informative early warning signals exhibit the highest degree of comovement with the financial cycle, but not the lowest level of endpoint uncertainty. Analysis of Hungarian credit-to-GDP time series extended by ARIMA simulations reinforces the early warning quality of the Hodrick–Prescott credit gap and the wavelet credit gap to a lesser extent.

Keywords: financial cycle; crises; early warning; univariate filtering methods (search for similar items in EconPapers)
JEL-codes: C20 C52 E32 G28 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2022
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-mac
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