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What is the Credit to GDP Gap?

By BYJU'S Exam Prep

Updated on: November 9th, 2023

The Credit-to-GDP gap is the difference between the credit-to-GDP ratio and its long-term trend. Lowe and Borio were the first to describe the feature as an early warning indicator (EWI) for banking crises. The credit-to-GDP ratio has proven useful as an indicator of financial fragility.

Credit to GDP Gap

It has received attention from both practitioners and academics. The criticism concerns the following points.

  • The credit gap is not the best EWI for banking crises, especially in emerging nations.
  • In the credit gap, there are measuring issues.
  • The credit gap is not a useful reserve guide since it may lead to decisions contrary to the CCB’s goal.

A greater loan-to-GDP ratio demonstrates the banking sector’s aggressive and active participation in the real economy. A lower score, on the other hand, suggests the need for additional formal credit.

Summary:

What is the Credit to GDP Gap?

The credit-to-GDP gap is the discrepancy between the long-term trend and the credit-to-GDP ratio. Lowe and Borio were the first to document its features, which are a helpful early warning indicator (EWI) for banking crises.

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