On the long-run calibration of the credit-to-GDP gap as a banking crisis predictor
Karlo Kauko and
No 6/2019, Research Discussion Papers from Bank of Finland
The trend deviation of the Credit-to-GDP ratio (“Basel gap”) is a widely used early warning indicator of banking crises. It is calculated with the one-sided Hodrick-Prescott filter using an extremely large value of the smoothing parameter λ. We recalibrate the smoothing parameter with panel data covering almost one and a half centuries and 15 countries. The optimal λ is found to be much lower than previously suggested. The 2008 crisis does not dominate the results. The long sample almost eliminates filter initialisation problems.
JEL-codes: G01 E44 N20 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:bof:bofrdp:2019_006
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