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On the long-run calibration of the credit-to-GDP gap as a banking crisis predictor

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  • Kauko, Karlo
  • Tölö, Eero

Abstract

The trend deviation of the Credit-to-GDP ratio (“Basel gap”) is a widely used early warning indicator of banking crises. It is calculated with the one-sided Hodrick-Prescott filter using an extremely large value of the smoothing parameter λ. We recalibrate the smoothing parameter with panel data covering almost one and a half centuries and 15 countries. The optimal λ is found to be much lower than previously suggested. The 2008 crisis does not dominate the results. The long sample almost eliminates filter initialisation problems.

Suggested Citation

  • Kauko, Karlo & Tölö, Eero, 2019. "On the long-run calibration of the credit-to-GDP gap as a banking crisis predictor," Research Discussion Papers 6/2019, Bank of Finland.
  • Handle: RePEc:bof:bofrdp:2019_006
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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