The Unreliability of Credit-to-GDP Ratio Gaps in Real Time: Implications for Countercyclical Capital Buffers

Rochelle M. Edge and Ralf R. Meisenzahl
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Rochelle M. Edge: Office of Financial Stability Policy and Research, Federal Reserve Board
Ralf R. Meisenzahl: Division of Research and Statistics, Federal Reserve Board

International Journal of Central Banking, 2011, vol. 7, issue 4, 261-298

Abstract: Macroeconomists have long recognized that activity-gap measures are unreliable in real time and that this can present serious difficulties for stabilization policy. This paper investigates whether the credit-to-GDP ratio gap, which has been proposed as a reference point for accumulating countercyclical capital buffers, is subject to similar problems. We find that ex post revisions to the U.S. credit-to-GDP ratio gap are sizable and as large as the gap itself, and that the main source of these revisions stems from the unreliability of end-of-sample estimates of the series’ trend rather than from revised estimates of the underlying data. The paper considers the potential costs of gap mismeasurement. We find that the volume of lending that may incorrectly be curtailed is potentially large, although loan interest rates appear to increase only modestly.

JEL-codes: E61 G28 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (136)

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