On the long-run calibration of the credit-to-GDP gap as a banking crisis predictor

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Title: On the long-run calibration of the credit-to-GDP gap as a banking crisis predictor
ISBN: 978-952-323-264-8
Author: Kauko, Karlo ; Tölö, Eero
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
ISSN: 1456-6184
Series year: 2019
Series number: 6/2019
Year of publication: 2019
Publication date: 22.2.2019
Pages: 14
Subject (yso): pankkikriisit; ennustaminen; indikaattorit
JEL: G01; E44; N20
Other keywords: Banking crises; Early warning; Basel gap
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.
Rights: https://helda.helsinki.fi/bof/copyright


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