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The unreliability of credit-to-GDP ratio gaps in real-time: Implications for countercyclical capital buffers

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  • Rochelle M. Edge
  • Ralf R. Meisenzahl
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    Abstract

    Macroeconomists have long recognized that activity-gap measures are unreliable in real time and that this can present serious difficulties for stabilization policy. This paper investigates whether the credit-to-GDP ratio gap, which has been proposed as a reference point for accumulating countercyclical capital buffers, is subject to similar problems. We find that ex-post revisions to the U.S. credit-to-GDP ratio gap are sizable and as large as the gap itself, and that the main source of these revisions stems from the unreliability of end-of-sample estimates of the series' trend rather than from revised estimates of the underlying data. The paper considers the potential costs of gap mismeasurement. We find that the volume of lending that may incorrectly be curtailed is potentially large, although loan interest-rates appear to increase only modestly.

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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2011-37.

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    Date of creation: 2011
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    Handle: RePEc:fip:fedgfe:2011-37

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    Keywords: Bank capital ; Bank loans ; Business cycles;

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    References

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    1. Borgy, V. & Clerc, L. & Renne, J-P., 2009. "Asset-price boom-bust cycles and credit: what is the scope of macro-prudential regulation?," Working papers 263, Banque de France.
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    Cited by:
    1. Tony Wolken, 2013. "Measuring systemic risk: the role of macro-prudential indicators," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 76, pages 13-30, December.
    2. Kyuil Chung & Jong-Eun Lee & Elena Loukoianova & Hail Park & Hyun Song Shin, 2014. "Global Liquidity through the Lens of Monetary Aggregates," IMF Working Papers 14/9, International Monetary Fund.
    3. Mathias Drehmann & Claudio Borio & Kostas Tsatsaronis, 2011. "Anchoring Countercyclical Capital Buffers: The role of Credit Aggregates," International Journal of Central Banking, International Journal of Central Banking, vol. 7(4), pages 189-240, December.
    4. Behn, Markus & Detken, Carsten & Peltonen, Tuomas A. & Schudel, Willem, 2013. "Setting countercyclical capital buffers based on early warning models: would it work?," Working Paper Series 1604, European Central Bank.
    5. Tobias Adrian & Daniel Covitz & Nellie Liang, 2013. "Financial stability monitoring," Finance and Economics Discussion Series 2013-21, Board of Governors of the Federal Reserve System (U.S.).
    6. Gete, Pedro & Tiernan, Natalie, 2014. "Lending Standards and Countercyclical Capital Requirements under Imperfect Information," MPRA Paper 54486, University Library of Munich, Germany.
    7. Mathias Drehmann, 2013. "Total credit as an early warning indicator for systemic banking crises," BIS Quarterly Review, Bank for International Settlements, June.
    8. Farrell, Greg, 2014. "Countercyclical capital buffers and real-time credit-to-GDP gap estimates: A South African perspective," MPRA Paper 55368, University Library of Munich, Germany.
    9. Q. Farook Akram, 2012. "Macro effects of capital requirements and macroprudential policy," Working Paper 2012/21, Norges Bank.
    10. Mathias Drehmann & Kostas Tsatsaronis, 2014. "The credit-to-GDP gap and countercyclical capital buffers: questions and answers," BIS Quarterly Review, Bank for International Settlements, March.
    11. Niels-Jakob Harbo Hansen & Olga Sulla, 2013. "Credit Growth in Latin America," IMF Working Papers 13/106, International Monetary Fund.

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