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Recent Evolution of Canada’s Credit-to-GDP Gap: Measurement and Interpretation

Thibaut Duprey, Timothy Grieder and Dylan Hogg

Staff Analytical Notes from Bank of Canada

Abstract: Over the past several years, the Bank for International Settlements has noted that Canada’s credit-to-GDP gap has widened and is above thresholds indicating future banking stress. In this note we take a closer look at the subcomponents of credit and find that (i) excluding non-financial government enterprises narrows the credit-to-GDP gap to well below worrisome thresholds and (ii) excluding borrowings between interrelated corporations (i.e., focusing only on borrowing through banks or financial markets) significantly decreases the level of the credit to GDP ratio and modestly widens the gap. We also review the literature and discuss the benefits and limitations of using the credit-to-GDP gap as a measure of vulnerabilities in the Canadian financial system.

Keywords: Business fluctuations and cycles; Credit and credit aggregates; Financial stability; Monetary and financial indicators; Recent economic and financial developments; Sectoral balance sheet (search for similar items in EconPapers)
JEL-codes: D1 E3 E32 G01 G1 G2 G21 G3 G30 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:bca:bocsan:17-25