Which one of the following is a good statistic to evaluate where an economy stands in the financial cycle?

The Credit/GDP ratio is a critical statistic for evaluating an economy's position in the financial cycle. The 'credit-to-GDP gap', defined as the difference between the actual credit-to-GDP ratio and its long-run trend, serves as a primary early warning indicator for potential banking crises and systemic distress. This indicator is globally recognized under the Basel III framework to guide the implementation of countercyclical capital buffers, which are designed to mitigate risks during periods of excessive credit growth [1]. While other ratios like Fiscal Deficit/GDP or Tax/GDP focus on fiscal health and government borrowing requirements [2], the Credit/GDP ratio specifically captures the build-up of financial imbalances and 'excessive credit' within the private non-financial sector. High deviations from the trend indicate a peak in the financial cycle, signaling increased vulnerability and the potential for sharp economic contractions [2].

Sources

1. [1] https://www.financialresearch.gov/conferences/files/gieseandersenbushcastrofaragkapadia_paper_y.pdf
2. [2] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > 5.2.1 Measures of Government Deficit > p. 72