How Should Credit Gaps Be Measured? An Application to European Countries
IMF Working Papers, January 17, 2020
Source details
- Canonical URL
- How Should Credit Gaps Be Measured? An Application to European Countries
Other formats
Bibliographic details
- Authors: Chikako Baba, Salvatore Dell'Erba, Enrica Detragiache, Olamide Harrison, Aiko Mineshima, Anvar Musayev, Asghar Shahmoradi
- Published: January 17, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513525877.001
Summary and research question
- Assessing when credit is excessive is important to understand macro-financial vulnerabilities and guide macroprudential policy.
- The Basel Credit Gap (BCG) is defined as the deviation of the credit-to-GDP ratio from its long-term trend estimated with a one-sided Hodrick-Prescott (HP) filter.
- The BCG is the indicator preferred by the Basel Committee because of its good performance as an early warning of banking crises.
- For a number of European countries the BCG implausibly suggests that credit should revert to its level at the peak of the boom after the credit cycle turns, producing large negative gaps that might delay the activation of macroprudential policies.
Approaches evaluated
- Multivariate filter based on economic theory:
- Provides an alternative trend extraction that incorporates economic relationships.
- Pros and cons relative to the BCG are discussed in the paper.
- Fundamentals-based panel regression:
- Uses macroeconomic fundamentals across countries to estimate a benchmark credit level.
- Also has advantages and limitations compared with the BCG.
- Both approaches are presented as useful complements to the BCG in assessing macro-financial vulnerabilities in Europe.
Main findings and implications
- The BCG performs well as an early warning indicator of banking crises but can produce implausible large negative gaps for several European countries after the peak of credit booms.
- Large negative BCG gaps could delay the activation of macroprudential policies because they imply credit must fall to prior boom peak levels.
- The multivariate filter and the fundamentals-based panel regression each offer complementary perspectives and can mitigate the implausible post-boom negative gap problem observed with the BCG for some European countries.
- Policy implication: Using alternative measures alongside the BCG can improve assessment of credit excesses and the timely activation of macroprudential tools such as the Countercyclical Capital Buffer.
Publication and metadata
- Title: How Should Credit Gaps Be Measured? An Application to European Countries
- Authors: Chikako Baba, Salvatore Dell'Erba, Enrica Detragiache, Olamide Harrison, Aiko Mineshima, Anvar Musayev, Asghar Shahmoradi
- Series: IMF Working Papers
- Series number: Working Paper No. 2020/006
- Issue: 006
- Volume: 2020
- Pages: 41
- Publication date: January 17, 2020
- DOI: https://doi.org/10.5089/9781513525877.001
- Stock No: WPIEA2020006
- ISBN: 9781513525877
- ISSN: 1018-5941
- Subjects and keywords: Credit, Credit booms, Credit cycles, Credit gaps, Financial sector policy and analysis, Financial services, Money, Real interest rates; BCG filter, BCG measure, BCG methodology, Countercyclical Capital Buffer, credit demand, credit supply factor, Europe, GDP, Macroprudential Policies
Source: IMF Working Paper "How Should Credit Gaps Be Measured? An Application to European Countries", January 17, 2020.
Content in this bundle
- Working Paper