Exploring BIS credit-to-GDP gap critiques: the Swiss case

A growing body of literature has highlighted two important caveats to the credit-to-GDP gap as advocated by the Bank for International Settlements (BIS). The first relates to the approach used to normalise credit (i.e. dividing nominal credit by GDP). In this regard, critics have argued that GDP movements, that may or may not be relevant, run the risk of affecting a normalised measure of credit. The second relates to the use of the Hodrick-Prescott (HP) filter to estimate the gap’s trend component. In this regard, critics have emphasised several measurement problems associated with using the HP filter. In this paper, we assess the relevance of these critiques for Switzerland. Our findings show that despite its drawbacks, the BIS gap is a reliable measure of excess credit in Switzerland. Alternatives do not provide clear advantages, rather they are considerably more complex to estimate and come with their own set of pitfalls. For policymaking purposes, the BIS gap’s signal should be complemented with narratives based on a broader set of credit metrics to ensure that an all-encompassing risk assessment is made.

Degrowth and Full Employment

This paper advocates for the use of techniques of optimal planning that were developed by Soviet mathematicians. It argues that these techniques, based as they are on the labour theory of value, are compatible with: (a) the efforts of Modern Monetary Theorists to achieve full employment through a return to active fiscal policy (with the GDP gap serving as an estimate of the level of additional aggregate demand required to this end); (b) national income accounting procedures taken up by the United Nations; (c) the work of industrial ecologists who use input-output techniques to support and inform their analysis of waste, pollution, and the unsustainable use of renewable and non-renewable resources. It argues that, with slight modification, the techniques originally developed by Kantorovich and Novozhilov could be applied to the construction of metrics that account for the ‘short-changing’ of nature. For example, they could incorporate estimates of the labour time required to prevent unsustainable exploitation of renewable resources (including through higher levels of recycling and restocking), the use of non-renewable resources at rates exceeding the time required to produce substitutes, and the time required for adequate remediation and restoration of polluted resources (including investment in new transport and power generation systems).

Relationship between Economic Growth and Unemployment Rates in the Algerian Economy: Application of Okun’s Law during 1991–2019

This paper aims to examine the Algerian economy by applying Okun’s law to study the impact of real GDP on unemployment rates and examine the impact of labour market protection policies on Okun’s coefficients. The annual data on the Algerian economy for the period 1991–2019 were used. The autoregressive distributed lag (ARDL) bounds testing technique model was used in conjunction with the gap version for Okun’s coefficients. The empirical results show that Okun’s law operates in Algeria’s economy. Coefficients estimated using the gap version led to the conclusion that there was a negative and significant impact of the GDP gap on unemployment rates. Though there was a decline in unemployment as GDP increased, the rise in employment was very weak for each 1% increase in the GDP. These findings should be of significant interest to regulators and policymakers in the Algerian economy, practitioners and academic researchers, international and national investors, managers and any other groups interested in the labour market in the Algerian economy and the labour markets of other developing economies. The paper provides the real GDP’s effect on unemployment rates in Algeria by releasing the gap version for Okun’s coefficient. Also, it provides evidence that increased labour market protection mitigates the adverse effects of a decrease in output growth rate on employment.

Estimating Optimal Inflation Rate in Saudi Arabia: Using Dynamic Threshold Regression Model

This study evaluates the relationship between inflation and the output gap in Saudi Arabia. Specifically, it determines a level of optimal inflation for the output gap given the changes in the economic cycle. The novelty of this study’s research question is linking optimal inflation with the non-oil output gap in Saudi Arabia by constructing a dynamic threshold regression model. The estimation is carried out by using a yearly time series from 1981 to 2019. The variables used in our model are based on existing economic theories that have established a correlation between the GDP gap as the dependent variable and inflation, money supply, and total exports as explanatory variables. The results obtained in this study suggest the existence of a threshold level of inflation of which the turning point is located at 3 percent.

The Effectiveness of Credit-to-GDP Gap as a Leading Indicator of Banking Crises in India

As per the 15th progress report on adoption of the BASEL regulatory framework, published in October 2018 by Basel Committee on Banking Supervision, 26 member jurisdictions now have final rules in force for CCCB. In India, the final rules on CCCB came into force from 5th Feb, 2014; however, the buffer has not been activated by RBI till now as in its assessment, the Credit to GDP gap and other indicators currently do not warrant activation of the countercyclical capital buffer (CCCB). The Basel III regulatory framework for more resilient banks and banking systems, released in December 2010, had introduced the CCCB aimed at strengthening banks defense against the build-up of systemic vulnerabilities. The CCCB is a pre-emptive measure that requires banks to build-up capital gradually as imbalances in the credit market develop. The primary objective of CCCB is to avoid any banking industry stress resulting from wide fluctuations in the credit cycle using the credit-to-GDP gap. In doing so, it raises the cost of capital for banks resulting in moderation of credit demand as well as dissuasion of banks from participating in binge credit growth during the buildup phase itself. The authors have calculated the credit-to-GDP gap (which has been accepted as the main Indicator) for India using the available data and conclude that the buffer guide has historically worked as a reliable EWI in the Indian context. The authors have also concluded that while CCCB is an instrument to protect banks from the bust phase of the financial cycle, it is not an instrument to manage the financial cycle, even if it may potentially have a smoothing impact. An important implication of implementing CCCB using the credit-to-GDP gap as the main indicator for banks and EMEs is that it may hinder beneficial financial deepening, if it is used to actively manage the financial cycle. The authors recommend including the attribution of the Credit-to-GDP GAP w.r.t., the changes attributable to GDP growth, as well as attributable to changes in credit growth in the decision making process to activate CCCB.

Key interest rate in optimal monetary policy in Ukraine

In the paper, the empirical examine of Taylor rule use in case of Ukraine has presented. The obtained results has shown that the most significant influence on interest rate makes inflation rate and interest rate in previous period. It had been found that 1% change of consumption prices and interest rate in previous period increases interest rate by 1,28 and 0,71% respectively. Instead 1% change in GDP gap causes only 0,04% change in interest rate. The obtained results has shown that 1% change of inflation gap provoke National Bank of Ukraine to increase interest rate by 0,8%.

The Green GDP Implementation in Country-Based Environmental Management System: A Review

The economy, environment, and social pillars of sustainability demand the environmental management system (EMS) to improve the cycle system continuously. The result of the evaluation and review stages needs to account for the measurement method that potentially enhances the policy implication. Thus, the green GDP found to be practically suited with current country-based EMS, where it shows by China’s green GDP and GDP gap reached 5% in 2016. The objective of this paper is to acknowledge the implementation of green GDP in the country-based environmental management system. This paper is based on a literature review process, which covered around eight references. The result and discussion lead to the implementation of green growth indicator in national and regional green economy strategy of Indonesia, China, and Finland. The challenges of unstandardized indicators and calculation formula prospected to be tackled by reflecting the current indicator with potential global adjusted formula and valuation through international policy enforcement and integrated communication. The conclusion describes that green GDP is potentially integrated with EMS to ensure the improved cycle of sustainability.

Can key interest rates decrease output gaps?

The difference in the GDP levels is crucial for the macroeconomic forecasting to develop adequate and supportive fiscal and monetary policies. Most mismeasurements under current geoeconomics challenges can be explained by the difficulty in predicting recessions and the overestimation of the economy’s potential capacity. The research aims to consider the GDP gap’s effectiveness for the possible forecasting of the monetary policy, particularly the central bank’s interest rate. The study uses quantitative methods, particularly VAR modeling. The VAR model is chosen as a proven useful tool for describing the dynamic behavior of economic time series and forecasting. The data sample is chosen as Eurozone, the United States, and Japan. The similarity is detected on output gaps implementation in the considered states; however, the variety in the responses to the financial crisis is revealed. This difference is due to the different sensitivity of economies on the impact of monetary instruments. In particular, the Japanese economy has a relatively low level of sensitivity to changes in monetary instruments. In terms of the reactions of central banks to the current economic crisis caused by COVID-19, then due to the global lockdown and the incredible decline in economic activity, almost all countries are in a situation of negative GDP gap according the paper’s approach. However, the measures to mitigate it will vary in different states. AcknowledgmentThe paper is done in the framework of scientific faculty research 16КF040-04 “Steady-state security assessment: a new framework for analysis” (2016–2021), Taras Shevchenko National University of Kyiv (Ukraine).

Impact of the Monetary Policy Rules on the Inflation Targeting

The standard version of the Taylor rule includes the inflation gap and the GDP gap in the right-hand side. I describe a modified version of it, where the exchange rate growth also determines the interest rate change. I estimate this version for a number of IT and non-IT countries in the periods before and after the financial crisis of 2008. First, countries of both groups are leading the similar politics post 2008. Second, if a central bank pays more attention to the inflation gap and GDP growth, it has a higher probability of an inflation target achievement.