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.
Table of content
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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