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.