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Exploring BIS credit-to-GDP gap critiques: the Swiss case

Terhi Jokipii, Reto Nyffeler and Stéphane Riederer

No 2020-19, Working Papers from Swiss National Bank

Abstract: A growing body of literature has highlighted two important caveats to the credit-to-GDP gap as advocated by the Bank for International Settlements (BIS). The first relates to the approach used to normalise credit (i.e., dividing nominal credit by GDP). In this regard, critics have argued that a normalised measure of credit runs the risk of being affected by GDP movements that may or may not be relevant. The second relates to the use of the Hodrick-Prescott (HP) filter to estimate the gap's trend component. In this regard, critics have emphasised several measurement problems associated with using the HP filter. In this paper, we assess the relevance of these critiques for Switzerland. While we find no compelling evidence suggesting a need to deviate from using the BIS gap as a reliable excess credit measure, our findings do emphasise the need to interpret its signal with caution, particularly during long-lasting boom phases and subsequent bust phases. In these situations in particular, authorities should strengthen their decision-making frameworks with additional credit relevant indicators.

Keywords: BIS gap; credit-to-GDP; macroprudential policy; HP filter (search for similar items in EconPapers)
JEL-codes: E44 E51 E61 G01 G21 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2020
New Economics Papers: this item is included in nep-ban, nep-eec, nep-fdg and nep-mac
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