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.