On the Long-Run Calibration of the Credit-to-Gdp Gap as a Banking Crisis Predictor

14 Pages Posted: 26 Feb 2019 Last revised: 1 Mar 2019

See all articles by Karlo Kauko

Karlo Kauko

Bank of Finland

Eero Tölö

Bank of Finland - Financial Markets

Date Written: February 22, 2019

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.

JEL Classification: G01, E44, N20

Suggested Citation

Kauko, Karlo and Tölö, Eero, On the Long-Run Calibration of the Credit-to-Gdp Gap as a Banking Crisis Predictor (February 22, 2019). Bank of Finland Research Discussion Paper No. 6/2019, Available at SSRN: https://ssrn.com/abstract=3341887

Karlo Kauko (Contact Author)

Bank of Finland ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

Eero Tölö

Bank of Finland - Financial Markets ( email )

P.O Box 160
FIN-00101 Helsinki
Finland

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