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Working Papers

(WP2/2020) Weighing up the Credit-to-GDP gap: A cautionary note

Publish Date: : February 2020
Authors:: Özer Karagedikli and Ole Rummel

Summary


A new SEACEN Working Paper by Özer Karagedikli and Ole Rummel titled “Weighing up the Credit-to-GDP gap: A cautionary note” is now available. The authors take a look at the weights attached to the trend estimates in the way the BIS calculates the credit-to-GDP trends/gaps, which are then used in the countercyclical capital buffer calculations proposed by the Basel Committee on Banking Supervision. By using financial crises as a laboratory the authors argue that these trends have some unwanted properties.  In particular:

  1. up to 40 lags (10 years) of past data are used in the calculation of the trend component of the credit-to-GDP ratio; and
  2. past data that belongs to an ‘old-regime’ prior to a financial crises continue to influence the estimates of the trend for about a decade to come