Towards an understanding of credit cycles: do all credit booms cause crises?

Ray Barrell, Dilruba Karim and Corrado Macchiarelli

Working Paper series from Rimini Centre for Economic Analysis

Abstract: Macroprudential policy is now based around a countercyclical buffer, relating capital requirements for banks to the degree of excess credit in the economy. We consider the construction of the credit to GDP gap looking at different ways of extracting the cyclical indicator for excess credit. We compare different smoothing mechanisms for the credit gap, and demonstrate that some countries require an AR(2) smoother whilst other do not. We embed these different estimates of the credit gap in Logit models of financial crises, and show that the AR(2) cycle is a much better contributor to their explanation than is the HP filter suggested by the BIS and currently in use in policy making. We show that our results are robust to changes in assumptions, and we make criticisms of current policy settings.

Keywords: credit cycle; financial crisis; banks; macro-prudential policy; filtering (search for similar items in EconPapers)
Date: 2017-10
New Economics Papers: this item is included in nep-ban and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://www.rcea.org/RePEc/pdf/wp17-28.pdf

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Working Paper: Towards an understanding of credit cycles: do all credit booms cause crises? (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:17-28

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