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Financial crises, macroprudential policy and the reliability of credit-to-GDP gaps

Piergiorgio Alessandri, Pierluigi Bologna () and Maddalena Galardo
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Pierluigi Bologna: Bank of Italy

No 567, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: The Basel III regulation explicitly prescribes the use of Hodrick-Prescott filters to estimate credit cycles and calibrate countercyclical capital buffers. However, the filter has been found to suffer from large ex-post revisions, raising concerns over its fitness for policy use. To investigate this problem, we studied the credit cycles of a panel of 26 countries between 1971 and 2018. We reached two conclusions. The bad news is that the limitations of the one-sided HP filter are serious and pervasive. The good news is that they can easily be mitigated. The filtering errors are persistent and hence predictable. This can be exploited to construct real-time estimates of the cycle that are less subject to ex-post revisions, forecast financial crises more reliably, and stimulate the build-up of bank capital before a crisis.

Keywords: Hodrick-Prescott filter; credit cycle; macroprudential policy (search for similar items in EconPapers)
JEL-codes: E32 G01 G21 G2 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-ban and nep-mac
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