Credit-to-GDP Gap Estimates in Real Time: A Stable Indicator for Macroprudential Policy Making in Croatia

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. The Basel gap is the most commonly used indicator in the EU, as it is a part of the Basel III regulatory framework as a standardized and harmonized indicator. Countercyclical capital buffer (CCyB) calibration is one of several macroprudential policy concepts based on the Basel gap. However, due to the endpoint problem of the Hodrick-Prescott (HP) filter to the estimation of the Basel gap, CCyB calibration remains a challenge. This study focuses on defining a clear set of criteria that can be used to solve the endpoint problem of the filtering process. This approach is appropriate for authorities whose analysis shows that the HP based indicators are the 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. Such augmented gaps reduce the bias in the gap series after turning points in the financial cycle.