Combining different series and adjusting for breaks: an example

(Extract from page 71 of BIS Quarterly Review, March 2013)

To compile the long-run credit series for Ireland, four credit series are used:

• Broad monetary aggregate (M3) from Q2 1971 to Q2 1992
• Domestic bank credit from Q3 1992 to Q1 1999
• Domestic bank credit and cross-border bank credit from Q2 1999 to Q4 2001
• Total credit from the financial accounts from Q1 2002

Each transition implies breaks in the lender coverage leading to shifts in the level of total credit. In particular, at the end of Q3 1992, domestic bank credit was 52% higher than M3. At the end of Q2 1999, adding cross-border bank credit increases the level of total credit by 42%. And at the end of Q1 2002, the total credit from the financial accounts exceeded the sum of domestic and cross-border bank credit by 10%.

Break-adjusted credit series were obtained by taking total credit as reported in the financial accounts and scaling up (ie multiplying) the sum of domestic and cross-border bank credit by a factor of 1.10 between Q2 1999 and Q4 2001, bank credit by a factor of 1.56 (= 1.10 * 1.42) between Q3 1992 to Q1 1999 and M3 by a factor of 2.37 (= 1.10 * 1.42 * 1.52) before Q3 1992.¹

¹ Table 3 reports the average differences between break-adjusted (BA) and unadjusted (UA) total credit relative to the adjusted series.These numbers reflect the adjustment factors (af) and break dates. For instance, for 1970-90 in Ireland, the table shows that (BA - UA) / BA was on average 58%, which is equal to 1 -UA / BA = 1 - (af_1971-92)^-1 = 1 - 1 / 2.37.

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