Semi-Structural Credit Gap Estimation

54 Pages Posted: 14 Nov 2018

See all articles by Jan Hannes Lang

Jan Hannes Lang

European Central Bank (ECB)

Peter Welz

European Central Bank

Date Written: November 13, 2018


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 semi-structural 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.

Keywords: equilibrium credit, credit cycles, financial crises, macro-prudential analysis, early-warning models

JEL Classification: E32, E51, E21, G01, D15

Suggested Citation

Lang, Jan Hannes and Welz, Peter, Semi-Structural Credit Gap Estimation (November 13, 2018). ECB Working Paper No. 2194, Available at SSRN: or

Jan Hannes Lang (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

Peter Welz

European Central Bank ( email )

Kaiserstrasse 29
Frankfurt am Main, DE D-60311


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