France

Macroprudential policy setting faces the challenge of identifying growth of financial and macroeconomic variables above and below potential. The gaps between actual performance and potential are crucial for policy makers but are unobserved. This is especially true for financial variables such as capital and risk of default of borrowers (firms and banks) and lenders (banks and households). Against this backdrop, a macrofinancial structural model is presented that captures (i) sectoral dynamics of firms and banks and feedbacks between them, (ii) capital and default risk dynamics of each sector, (iii) capital and risk gaps i.e., deviations of capital and default risk from potential (the welfare maximizing optimum), and it provides (iv) a quantitative method for measurement.