The Evolution of the Credit‐to‐GDP Ratio: An Empirical Analysis

• DOI: http://doi.org/10.1111/irfi.12165
• Date: 01 March 2019
• Author: Tommaso Trani,Luis Alberiko Gil‐Alana
• Published date: 01 March 2019

The Evolution of the Credit-to-GDP

Ratio: An Empirical Analysis*

LUIS ALBERIKO GIL-ALANA

†

AND TOMMASO TRANI

‡

†

School of Economics and Business & Navarra Center Navarra Center for

International Development, Universidad de Navarra, Pamplona, Spain and

‡

School of Economics and Business, Universidad de Navarra, Pamplona, Spain

ABSTRACT

We assess the persistence of the credit-to-GDP ratio over more than 130 years

of data for 11 advanced economies, employing an approach based on frac-

tional integration and allowing for nonlinearities. We show how the time

series properties of the data changed around World War II (WWII). More-

over, our findings are consistent with the idea that the supply of mortgage

loans has been particularly strong since WWII, in the sense that the degree

of integration of the leverage ratio obtained with only these loans is larger

than that of the ratio obtained with the total loans for almost all the studied

countries. Nevertheless, it is generally the case that both types of ratios show

a higher degree of integration after WWII than before it, though often insig-

nificantly, and that their time trends are significant only after WWII.

JEL Codes: C22; E44; E51; F40; G10

Accepted: 16 October 2017

I. INTRODUCTION

Due to the boom-bust cycle of the last 15 years, the evolution of bank credit

has attracted a lot of attention, with particular emphasis put on how credit

behaves relative to gross domestic product (GDP). Policymakers have proposed

using the deviations of the credit-to-GDP ratio from its long-run trend (the

credit-to-GDP gap) as guidance for the countercyclical adjustment of the bank

capital buffer (Basel Committee on Banking Supervision 2010). Moreover, there

is evidence that the credit-to-GDP ratio is a more meaningful signal of strains

in financial markets than ratios based on money aggregates, being consistent

with the fact that, after World War II (WWII), credit has grown faster than

money (Schularick and Taylor 2012). Jordà et al. (2017) recently expanded this

evidence, documenting that mortgage loans and loans to households are the

major potential drivers of the post-war evolution in the credit-to-GDP ratio.

* The authors gratefully acknowledge the financial support received from the Ministerio de

Economía y Competitividad: ECO2014–55236 (Luis Alberiko Gil-Alana) and ECO 2015–68815-P

(Tommaso Trani).

© 2017 International Review of Finance Ltd. 2017

International Review of Finance, 19:1, 2019: pp. 237–244

DOI: 10.1111/irfi.12165