On the Long-Run Calibration of the Credit-to-Gdp Gap as a Banking Crisis Predictor
14 Pages Posted: 26 Feb 2019 Last revised: 1 Mar 2019
Date Written: February 22, 2019
The trend deviation of the Credit-to-GDP ratio (“Basel gap”) is a widely used early warning indicator of banking crises. It is calculated with the one-sided Hodrick-Prescott filter using an extremely large value of the smoothing parameter λ. We recalibrate the smoothing parameter with panel data covering almost one and a half centuries and 15 countries. The optimal λ is found to be much lower than previously suggested. The 2008 crisis does not dominate the results. The long sample almost eliminates filter initialisation problems.
JEL Classification: G01, E44, N20
Suggested Citation: Suggested Citation