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

Author/Editor:

Chikako Baba ; Salvatore Dell'Erba ; Enrica Detragiache ; Olamide Harrison ; Aiko Mineshima ; Anvar Musayev ; Asghar Shahmoradi

Publication Date:

January 17, 2020

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

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.

Series:

Working Paper No. 20/6

Subject:

English

Publication Date:

January 17, 2020

ISBN/ISSN:

9781513525877/1018-5941

Stock No:

WPIEA2020006

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

41

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