Credit Expansion in the Caucasus and Central Asia

This paper analyzes credit developments in the Caucasus and Central Asia (CCA) using several complementary approaches. First, it estimates long-run equilibrium credit levels based on economic fundamentals, providing benchmarks to assess whether observed credit levels are broadly aligned with country characteristics. Second, it applies statistical “gap” measures to identify periods of unusually rapid credit expansion that may signal emerging financial vulnerabilities. Third, it uses the Kalman filter to decompose credit into trend and cyclical elements conditional on macro variables. The results suggest there is scope for further financial deepening in all CCA economies, but the speed of household credit expansion warrants close monitoring. A comparative “horse race” of alternative indicators suggests that no single measure consistently outperforms others across countries, implying that combining various credit gap measures enhances the robustness of risk assessments.