Optimal Monetary Policy for Commercial Banks Involving Lending Rate Settings and Default Rates

Abstract In the modern industrial economies, the interest rates dynamics are influenced by the decisions of the Money Authority. With these decisions the Central Bank of a country wields a direct control on the trend of short–term interest rates and, through this way, it is in a position to influence indirectly the long–term interest rates. Typically the Money Authority resorts to this possibility with the aim to limit the fluctuations of the main economic variables. So that an immediate connection is established between the trend of the interest rates and the macro–economic variables with respect to the Central Bank, that is institutionally to have an influence. Within this framework, for example, the monetary policy rule introduced by Taylor (1993) provides the short–term interest rate as a function of the inflation rate and a measure of the business cycle. This approach is supported by the assumptions that the main objectives of the Central Bank are the control of the raise in prices as well as the real economy fluctuations. The efficaciousness of this relation–that explains in a simple way the behaviour of the short–term rates – has fostered empirical as well as theoretical studies.