Measuring the credit gap: a forecast combination approach

N Kishor and Nam Nguyen ()
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Nam Nguyen: Wintrust Bank

Swiss Journal of Economics and Statistics, 2025, vol. 161, issue 1, 1-12

Abstract: Abstract This paper proposes a new approach to calculating the credit gap: the deviation of the credit-to-GDP ratio from its long-run trend. Our method weights credit gap measures from different decomposition methods based on their out-of-sample forecasting performance. The results show that this weighted approach to estimating the credit gap outperforms other popular trend-cycle decomposition methods in predicting changes in the credit-to-GDP ratio. Furthermore, we also show that this combined credit gap measure can help mitigate the endpoint problem that is associated with conventional measures of credit gap.

Keywords: Credit gap; Trend-cycle decomposition; Forecast combination; Random forest model; C52; E44; G01 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1186/s41937-025-00133-w

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