Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/244266 
Year of Publication: 
2021
Series/Report no.: 
ESRB Working Paper Series No. 114
Publisher: 
European Systemic Risk Board (ESRB), European System of Financial Supervision, Frankfurt a. M.
Abstract: 
The Basel III regulation explicitly prescribes the use of Hodrick-Prescott filters to estimate credit cycles and calibrate countercyclical capital buffers. However, the filter has been found to suffer from large ex-post revisions, raising concerns on its fitness for policy use. To investigate this problem we study credit cycles in a panel of 26 countries between 1971 and 2018. We reach two conclusions. The bad news is that the limitations of the one-side HP filter are serious and pervasive. The good news is that they can be easily mitigated. The filtering errors are persistent and hence predictable. This can be exploited to construct real-time estimates of the cycle that are less subject to ex-post revisions, forecast financial crises more reliably, and stimulate the build-up of bank capital before a crisis.
Subjects: 
Hodrick-Prescott filter
credit cycle
macroprudential policy
JEL: 
E32
G01
G21
G28
Persistent Identifier of the first edition: 
ISBN: 
978-92-9472-178-5
Document Type: 
Working Paper

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