BIS economists test fixes for credit-to-GDP gap

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The Bank for International Settlements, Basel

The Bank for International Settlements, Basel

A working paper from the Bank for International Settlements tests several possible methods to improve the baseline credit-to-GDP gap’s effectiveness as an early warning indicator.

Mathias Drehmann and James Yetman acknowledge that credit-to-GDP gaps have drawbacks, despite their use in frameworks for setting the Basel III counter-cyclical capital buffer.

The Hodrick-Prescott filter used in the measure’s construction can create “spurious dynamics”, they say. The HP filter also suffers from “end

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