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Measuring Credit Gaps for Macroprudential Policy Guidance: An Application to Georgia

Author

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  • Akaki Liqokeli

    (Financial Stability Analysis and Macro-financial Modeling Division, National Bank of Georgia)

Abstract

According to international experience, episodes of rapid credit growth are often associated with increasing vulnerabilities within the financial system. It is of vital importance to identify risky credit expansions early enough so that macroprudential policy can respond and ensure overall financial stability. For this purpose, a reliable policy guide is essential to detect the build-up of systemic risks and to design optimal macroprudential policy responses. The Basel Committee on Banking Supervision recommends using the credit-to-GDP gap obtained from a one-sided Hodrick-Prescott (HP) filter as a common reference guide for setting the countercyclical capital buffer – a recently introduced macroprudential policy tool for addressing financial stability risks. This paper proposes two alternative approaches to credit-to-GDP gap estimation in order to enrich the analytical toolkit of the macroprudential policy framework. By addressing the shortcomings of the Basel credit-to-GDP gap, the proposed approaches offer more insightful and informationally efficient early warning indicators of financial stress. These indicators can complement the Basel credit-to-GDP gap in guiding more informed macroprudential policy decisions.

Suggested Citation

  • Akaki Liqokeli, 2020. "Measuring Credit Gaps for Macroprudential Policy Guidance: An Application to Georgia," NBG Working Papers 05/2020, National Bank of Georgia.
    • Handle: RePEc:aez:wpaper:2020-05
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    References listed on IDEAS

    as
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    3. Salome Tvalodze & Shalva Mkhatrishvili & Tamar Mdivnishvili & Davit Tutberidze & Zviad Zedginidze, 2016. "The National Bank of Georgia's Forecasting and Policy Analysis System," NBG Working Papers 01/2016, National Bank of Georgia.
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    More about this item

    Keywords

    Credit Cycle; Credit Gap; Countercyclical Capital Buffer; Macroprudential Policy; Financial Stability;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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