The Unreliability of Credit-to-GDP Ratio Gaps in Real-Time: Implications for Countercyclical Capital Buffers

International Journal of Central Banking. Vol. 7, No. 4. pp. 261-298.

FEDS Working Paper No. 2011-37

33 Pages Posted: 8 Nov 2011 Last revised: 23 Apr 2014

See all articles by Rochelle M. Edge

Rochelle M. Edge

Board of Governors of the Federal Reserve System

Ralf Meisenzahl

Federal Reserve Bank of Chicago

Date Written: August 10, 2011

Abstract

Macroeconomists have long recognized that activity-gap measures are unreliable in real time and that this can present serious difficulties for stabilization policy. This paper investigates whether the credit-to-GDP ratio gap, which has been proposed as a reference point for accumulating countercyclical capital buffers, is subject to similar problems. We find that ex-post revisions to the U.S. credit-to-GDP ratio gap are sizable and as large as the gap itself, and that the main source of these revisions stems from the unreliability of end-of-sample estimates of the series' trend rather than from revised estimates of the underlying data. The paper considers the potential costs of gap mismeasurement. We find that the volume of lending that may incorrectly be curtailed is potentially large, although loan interest-rates appear to increase only modestly.

Keywords: Countercyclical capital buffers, macroprudential policy, Basel III, trend-cycle decomposition, real-time data

JEL Classification: E61, G28

Suggested Citation

Edge, Rochelle M. and Meisenzahl, Ralf, The Unreliability of Credit-to-GDP Ratio Gaps in Real-Time: Implications for Countercyclical Capital Buffers (August 10, 2011). International Journal of Central Banking. Vol. 7, No. 4. pp. 261-298., FEDS Working Paper No. 2011-37, Available at SSRN: https://ssrn.com/abstract=1956719 or http://dx.doi.org/10.2139/ssrn.1956719

Rochelle M. Edge (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Ralf Meisenzahl

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

HOME PAGE: http://www.ralfmeisenzahl.com

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