engleski

Do we get cold feet when deciding on countercyclical capital buffer? Ways to deal with uncertainty in estimating credit to GDP gap in real time

Macroprudential policymakers track cyclical risk accumulation via a wide range of indicators. To make timely policy decisions, these indicators need to be valid, stable and a good representation of (future) financial cycle movements. Moreover, these indicators are used in different empirical settings as an approximation of the financial cycle. The credit-to-GDP gap (Basel gap) is the most used indicator in research and practice, as it is a part of the CRD directive as a standardized and harmonized indicator. Countercyclical capital buffer (CCyB) calibration is one of several macroprudential policy concepts based on the Basel gap or on some kind of its variant, among other relevant indicators. However, due to specific problems with the way the Basel gap is calculated, macroprudential policymakers tend to possess inaction bias regarding CCyB activation. Here, the focus will be on the uncertainty of the Hodrick-Prescott (HP) filter approach and the reduction of the end-point problem. The focus of the study is on investigating how to fix the endpoint problem of the HP filter for those authorities whose analysis shows that this indicator is best in predicting financial crisis. The results of this study can be used in real-time decision-making, as they are relatively simple to estimate and communicate, and such augmented gaps reduce a great bias in the gap series after the cycle turns. Moreover, the paper suggests possible corrections of the credit-to-GDP gap so that the resulted indicators are less volatile over time with stable signals for the policy decisionmaker.

credit-to-GDP gap ; out of sample forecasts ; augmented credit gap ; countercyclical capital buffer ; estimation uncertainty

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