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How Should Credit Gaps Be Measured? An Application to European Countries

Aiko Mineshima, Chikako Baba, Salvatore Dell'Erba, Asghar Shahmoradi, Olamide Harrison, Anvar Musayev and Enrica Detragiache ()

No 2020/006, IMF Working Papers from International Monetary Fund

Abstract: Assessing when credit is excessive is important to understand macro-financial vulnerabilities and guide macroprudential policy. The Basel Credit Gap (BCG) – the deviation of the credit-to-GDP ratio from its long-term trend estimated with a one-sided Hodrick-Prescott (HP) filter—is the indicator preferred by the Basel Committee because of its good performance as an early warning of banking crises. However, for a number of European countries this indicator implausibly suggests that credit should go back to its level at the peak of the boom after the credit cycle turns, resulting in large negative gaps that might delay the activation of macroprudential policies. We explore two different approaches—a multivariate filter based on economic theory and a fundamentals-based panel regression. Each approach has pros and cons, but they both provide a useful complement to the BCG in assessing macro-financial vulnerabilities in Europe.

Keywords: WP; GDP; credit growth; credit supply factor; supply factor; credit demand; BCG filter; credit shock; BCG measure; BCG's credit data; BCG methodology; Credit gaps; Credit; Real interest rates; Credit cycles; Credit booms; Global; Europe; Credit Cycle; Credit Gap; Countercyclical Capital Buffer; Macroprudential Policies (search for similar items in EconPapers)
Pages: 41
Date: 2020-01-17
New Economics Papers: this item is included in nep-ban, nep-eec and nep-mac
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Handle: RePEc:imf:imfwpa:2020/006