What is the credit to GDP gap?

By Ritesh|Updated : September 4th, 2022

The difference between the credit to GDP ratio and its long-term trend is called the credit to GDP gap. Lowe and Borio first documented the property as an early warning indicator (EWI) useful for banking crises. The credit-to-GDP gap has confirmed its benefits as an indicator of financial vulnerability.

Credit to GDP Gap

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

  • The credit gap for banking crises is not the best EWI, especially in emerging markets.
  • There are measurement problems in the credit gap.
  • The credit gap is not a good guide to reserve as it may lead to decisions inconsistent with the CCB's objective.

A higher ratio of loans to GDP indicates aggressive and active participation of the banking sector in the real economy. In contrast, a lower number indicates a need for more formal credit.


What is the credit to GDP gap?

The difference between the long-term trend and the credit to GDP ratio is called the credit to GDP gap. Its properties were first documented by Lowe and Borio, which is a useful early warning indicator (EWI) for banking crises.


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