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Semi-structural credit gap estimation

Author

Listed:
  • Lang, Jan Hannes
  • Welz, Peter
Abstract
This paper proposes a semi-structural approach to identifying excessive household credit developments. Using an overlapping generations model, a normative trend level for the real household credit stock is derived that depends on four fundamental economic factors: real potential GDP, the equilibrium real interest rate, the population share of the middle-aged cohort, and institutional quality. Semi-structural household credit gaps are obtained as deviations of the real household credit stock from this fundamental trend level. Estimates of these credit gaps for 12 EU countries over the past 35 years yield long credit cycles that last between 15 and 25 years with amplitudes of around 20%. The early warning properties for financial crises are superior compared to credit gaps that are obtained from purely statistical filters. The proposed semistructural household credit gaps could therefore provide useful information for the formulation of countercyclical macroprudential policy, especially because they allow for economic interpretation of observed credit developments. JEL Classification: E32, E51, E21, G01, D15

Suggested Citation

  • Lang, Jan Hannes & Welz, Peter, 2018. "Semi-structural credit gap estimation," Working Paper Series 2194, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20182194
    Note: 2731285
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2194.en.pdf
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    2. Cyril Couaillier & Valerio Scalone, 2020. "How does Financial Vulnerability amplify Housing and Credit Shocks?," Working papers 763, Banque de France.
    3. Karmelavičius, Jaunius & Mikaliūnaitė-Jouvanceau, Ieva & Petrokaitė, Austėja Petrokaitė, 2022. "Housing and credit misalignments in a two-market disequilibrium framework," ESRB Working Paper Series 135, European Systemic Risk Board.
    4. O'Brien, Martin & Velasco, Sofia, 2020. "Unobserved components models with stochastic volatility for extracting trends and cycles in credit," Research Technical Papers 09/RT/20, Central Bank of Ireland.
    5. Yao, Fang, 2022. "Estimating the Trend of the House Price to Income Ratio in Ireland," Research Technical Papers 8/RT/22, Central Bank of Ireland.
    6. Jorge E. Galán & Javier Mencía, 2018. "Empirical assessment of alternative structural methods for identifying cyclical systemic risk in Europe," Working Papers 1825, Banco de España.
    7. Zsuzsanna Hosszu & Gergely Lakos, 2022. "Early Warning Performance of Univariate Credit-to-GDP Gaps," MNB Occasional Papers 2022/142, Magyar Nemzeti Bank (Central Bank of Hungary).
    8. Attila Csajbok & Pervin Dadashova & Pavlo Shykin & Balazs Vonnak, 2020. "Consumer Lending in Ukraine: Estimation of the Equilibrium Level," Visnyk of the National Bank of Ukraine, National Bank of Ukraine, issue 249, pages 4-12.
    9. Albertazzi, Ugo & Barbiero, Francesca & Marqués-Ibáñez, David & Popov, Alexander & Rodriguez d’Acri, Costanza & Vlassopoulos, Thomas, 2020. "Monetary policy and bank stability: the analytical toolbox reviewed," Working Paper Series 2377, European Central Bank.
    10. Jorge E. Galán, 2019. "Measuring credit-to-gdp gaps. The hodrick-prescott filter revisited," Occasional Papers 1906, Banco de España.
    11. Akbas, Ozan E. & Betz, Frank & Gattini, Luca, 2023. "Quantifying credit gaps using survey data on discouraged borrowers," EIB Working Papers 2023/06, European Investment Bank (EIB).
    12. Jorge E. Galán & Javier Mencía, 2021. "Model-based indicators for the identification of cyclical systemic risk," Empirical Economics, Springer, vol. 61(6), pages 3179-3211, December.

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    More about this item

    Keywords

    credit cycles; early-warning models; equilibrium credit; financial crises; macro-prudential analysis;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G01 - Financial Economics - - General - - - Financial Crises
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving

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