Financial Crises, Macroprudential Policy and the Reliability of Credit-to-GDP Gaps

50 Pages Posted: 27 Jul 2020

Multiple version iconThere are 2 versions of this paper

Date Written: June 26, 2020

Abstract

The Basel III regulation explicitly prescribes the use of Hodrick-Prescott filters to estimate credit cycles and calibrate countercyclical capital buffers. However, the filter has been found to suffer from large ex-post revisions, raising concerns over its fitness for policy use. To investigate this problem, we studied the credit cycles of a panel of 26 countries between 1971 and 2018. We reached two conclusions. The bad news is that the limitations of the one-sided HP filter are serious and pervasive. The good news is that they can easily be mitigated. The filtering errors are persistent and hence predictable. This can be exploited to construct real-time estimates of the cycle that are less subject to ex-post revisions, forecast financial crises more reliably, and stimulate the build-up of bank capital before a crisis.

Keywords: Hodrick-Prescott filter, credit cycle, macroprudential policy

JEL Classification: E32, G01, G21, G2

Suggested Citation

Alessandri, Piergiorgio and Bologna, Pierluigi and Galardo, Maddalena, Financial Crises, Macroprudential Policy and the Reliability of Credit-to-GDP Gaps (June 26, 2020). Bank of Italy Occasional Paper No. 567, Available at SSRN: https://ssrn.com/abstract=3659989 or http://dx.doi.org/10.2139/ssrn.3659989

Piergiorgio Alessandri

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Pierluigi Bologna

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Maddalena Galardo (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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