On the Credit-to-GDP Gap and Spurious Medium-Term Cycles
8 Pages Posted: 20 Apr 2020
Date Written: March 27, 2020
The Basel III framework advises considering a reference indicator at the country level to guide the setting of the countercyclical capital buffer: the credit-to-GDP gap. In this paper, I provide empirical evidence suggesting that the credit-to-GDP gap is subject to spurious medium-term cycles, i.e. artificial boom-bust cycles with a maximum duration of around 40 years. This may impair its use as a reference indicator.
Keywords: Basel III, Hodrick-Prescott filter, detrending
JEL Classification: C10, E32, E58, G01
Suggested Citation: Suggested Citation