Detecting excessive credit growth: An approach based on structural counterfactuals

Magnus Saß

No 46, Berlin School of Economics Discussion Papers from Berlin School of Economics

Abstract: The Basel credit-to-GDP gap is the single most popular measure of excessive credit growth and the financial cycle in general. It is based, however, on a purely statistical understanding of excessiveness: Growth is excessive if the credit-to-GDP ratio (i.e. the ratio of credit to nominal GDP) is significantly above its long-term trend. This paper presents an alternative approach where variation in the credit-to-GDP ratio is decomposed into its structural economic drivers. Some of these economic drivers are assumed to be non-excessive (aggregate demand and supply shocks), and others to be potentially excessive (all other shocks). Based on this identification, I construct a more structural credit gap measure that quantifies the impact of excessive drivers. In an early-warning exercise, I show that this gap measure performs particulary well in predicting financial crises at relatively short horizons.

Keywords: financial cycles; conditional forecasting; time series; Bayesian VAR (search for similar items in EconPapers)
JEL-codes: C11 C32 C53 C61 G01 G32 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2024-08-19
New Economics Papers: this item is included in nep-cfn and nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:bdp:dpaper:0046

DOI: 10.48462/opus4-5591

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