On the long-run calibration of the credit-to-GDP gap as a banking crisis predictor
Kauko, Karlo; Tölö, Eero (30.11.2020)
JulkaisusarjaFinnish Economic Papers
Julkaisun pysyvä osoite onhttps://urn.fi/URN:NBN:fi:bof-202002181130
The credit-to-GDP gap is a widely used early warning indicator of banking crises. It has become standard to calculate this trend deviation with a one-sided Hodrick-Prescott filter that uses a much larger value for the smoothing parameter λ than commonly applied in most business-cycle studies. We recalibrate the smoothing parameter with panel data covering almost one-and-a-half centuries of data. As a result, the 2008 crisis does not dominate the results and sample length helps contain filter initialization problems, i.e. most observations are preceded by decades of data. The optimal λ is found to be much lower than previously suggested.
Published in BoF DP 6/2019 http://urn.fi/URN:NBN:fi:bof-201902251071