A Semi-Structural Framework for Measuring Credit Cycles in Europe

45 Pages Posted: 15 Sep 2023

Abstract

We develop a parsimonious semi-structural framework for measuring credit cycles using an unobserved component model of credit to the private sector, which can be used for macroprudential policy activation, such as the Counter-Cyclical Capital Buffer. Credit cycle estimation is undertaken using only information available at the time policymakers have to decide on instrument activation. This contrasts with common practice in the literature, where models are estimated using the full sample rather than in real time. Our credit cycle measure's early-warning properties for predicting financial crises are compared against benchmark real-time indicators for several European countries. It performs well in shorter prediction horizons and provides more persistent signals when compared to benchmarks, especially in out-of-sample exercises.

Keywords: Credit cycle, Financial Crises, Forecasting, State space, Bayesian Methods

Suggested Citation

de Oliveira, João Henrique Barata Gouveia and Pereira, Ana, A Semi-Structural Framework for Measuring Credit Cycles in Europe. Available at SSRN: https://ssrn.com/abstract=4573029 or http://dx.doi.org/10.2139/ssrn.4573029

João Henrique Barata Gouveia De Oliveira (Contact Author)

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

Ana Pereira

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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