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Credit-to-GDP gap: Local versus foreign currency credit

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  • Gjergj Legisi

    (Bank of Albania)

Abstract

The credit-to-GDP gap is a fundamental indicator used to identify credit bubbles. Currently, the indicator takes into account aggregate credit as a ratio of GDP, without distinguishing between local and foreign currency. In the Albanian financial system, foreign currency loans comprise about fifty percent of the total credit. Due to the large share of foreign currency loans, this paper evaluates the credit-to-GDP gap by local (Albanian lek) and foreign (Euro and US dollar) currency to assess their performance in identifying credit bubbles. This study concludes that using a modified version of credit-to-GDP gap, which extracts foreign currency fluctuations, provides a better overall performance than the standard approach. In addition, a split credit-to-GDP gap according to local and foreign currency provides similar performance to the standard and modified approach, but offers a more structure-based approach.

Suggested Citation

  • Gjergj Legisi, 2020. "Credit-to-GDP gap: Local versus foreign currency credit," IHEID Working Papers 13-2020, Economics Section, The Graduate Institute of International Studies.
    • Handle: RePEc:gii:giihei:heidwp13-2020
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    credit-to-GDP gap; foreign currency credit; countercyclical capital buffer.;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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