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Semi-structural credit gap estimation

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  • Lang, Jan Hannes
  • Welz, Peter

Abstract

This paper proposes a semi-structural approach to identifying excessive household credit developments. Using an overlapping generations model, a normative trend level for the real household credit stock is derived that depends on four fundamental economic factors: real potential GDP, the equilibrium real interest rate, the population share of the middle-aged cohort, and institutional quality. Semi-structural household credit gaps are obtained as deviations of the real household credit stock from this fundamental trend level. Estimates of these credit gaps for 12 EU countries over the past 35 years yield long credit cycles that last between 15 and 25 years with amplitudes of around 20%. The early warning properties for financial crises are superior compared to credit gaps that are obtained from purely statistical filters. The proposed semistructural household credit gaps could therefore provide useful information for the formulation of countercyclical macroprudential policy, especially because they allow for economic interpretation of observed credit developments. JEL Classification: E32, E51, E21, G01, D15

Suggested Citation

  • Lang, Jan Hannes & Welz, Peter, 2018. "Semi-structural credit gap estimation," Working Paper Series 2194, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20182194
    Note: 2731285
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2194.en.pdf
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    References listed on IDEAS

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    Cited by:

    1. Potjagailo, Galina & Wolters, Maik H., 2019. "Global financial cycles since 1880," IMFS Working Paper Series 132, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    2. Jorge E. Galán & Javier Mencía, 2018. "Empirical assessment of alternative structural methods for identifying cyclical systemic risk in Europe," Working Papers 1825, Banco de España;Working Papers Homepage.
    3. Jorge E. Galán, 2019. "Measuring credit-to-gdp gaps. The hodrick-prescott filter revisited," Occasional Papers 1906, Banco de España;Occasional Papers Homepage.

    More about this item

    Keywords

    credit cycles; early-warning models; equilibrium credit; financial crises; macro-prudential analysis;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G01 - Financial Economics - - General - - - Financial Crises
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving

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