Financial Crises, Macroprudential Policy and the Reliability of Credit-to-GDP Gaps

The Basel III regulation explicitly prescribes the use of Hodrick-Prescott filters to estimate credit cycles and calibrate countercyclical capital buffers. However, filter has been found suffer from large ex-post revisions, raising concerns over its fitness for policy use. To investigate this problem, we studied a panel 26 countries between 1971 2018. We reached two conclusions. bad news is that limitations one-sided HP are serious pervasive. good they can easily be mitigated. filtering errors persistent hence predictable. This exploited construct real-time estimates cycle less subject forecast financial crises more reliably, stimulate build-up bank before crisis.