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Interest rate and bank rescue policy

Author

Listed:
  • Emmanuel Caiazzo

    (Department of Economics and Statistics, University of Naples Federico II, CSEF, and MoFiR)

  • Alberto Zazzaro

    (University of Naples Federico II, CSEF and MoFiR)

Abstract

This paper presents a model in which the policy rate set by the central bank affects decisions about bank rescue policies when liquidity crises hit the banking system. We highlight a trade-off: maintaining an interest rate ensuring effective control over inflation escalates the costs of rescue interventions. We delve into this trade-off and determine the circumstances under which deviating from the target interest rate, thereby reducing intervention costs, enhances overall welfare. From a normative standpoint, our analysis indicates where liquidity risk is either low or high, the central bank should prioritize achieving the inflation target.

Suggested Citation

  • Emmanuel Caiazzo & Alberto Zazzaro, 2025. "Interest rate and bank rescue policy," Mo.Fi.R. Working Papers 191, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    • Handle: RePEc:anc:wmofir:191
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    File URL: http://docs.dises.univpm.it/web/quaderni/pdfmofir/Mofir191.pdf
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    More about this item

    Keywords

    Central Banking; Financial stability; Rescue Policies;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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