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Financial crises, macroprudential policy and the reliability of credit-to-GDP gaps

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  • Alessandri, Piergiorgio
  • Bologna, Pierluigi
  • Galardo, Maddalena

Abstract

The Basel III regulation explicitly prescribes the use of Hodrick-Prescott filters to estimate credit cycles and calibrate countercyclical capital buffers. However, the filter has been found to suffer from large ex-post revisions, raising concerns on its fitness for policy use. To investigate this problem we study credit cycles in a panel of 26 countries between 1971 and 2018. We reach two conclusions. The bad news is that the limitations of the one-side HP filter are serious and pervasive. The good news is that they can be easily mitigated. The filtering errors are persistent and hence predictable. This can be exploited to construct real-time estimates of the cycle that are less subject to ex-post revisions, forecast financial crises more reliably, and stimulate the build-up of bank capital before a crisis. JEL Classification: E32, G01, G21, G28

Suggested Citation

  • Alessandri, Piergiorgio & Bologna, Pierluigi & Galardo, Maddalena, 2021. "Financial crises, macroprudential policy and the reliability of credit-to-GDP gaps," ESRB Working Paper Series 114, European Systemic Risk Board.
    • Handle: RePEc:srk:srkwps:2021114
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    References listed on IDEAS

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    Cited by:

    1. Barbara Annicchiarico & Marco Carli & Francesca Diluiso, 2022. "Climate Policies, Macroprudential Regulation, and the Welfare Cost of Business Cycles," CEIS Research Paper 543, Tor Vergata University, CEIS, revised 31 Oct 2022.
    2. Hessler, Andrew, 2023. "Unobserved components model estimates of credit cycles: Tests and predictions," Journal of Financial Stability, Elsevier, vol. 66(C).
    3. Pierluigi Bologna & Maddalena Galardo, 2022. "Calibrating the countercyclical capital buffer for Italy," Questioni di Economia e Finanza (Occasional Papers) 679, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    credit cycle; Hodrick-Prescott filter; macroprudential policy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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