The interaction between prudential policies and bailouts is "delicate", according to a working paper published today by the Central Bank of Chile, which is wary of policy-makers' actions backfiring by worsening the "commitment problem" associated with bailouts.

In Bailouts and prudential policies – a delicate interaction, Ernesto Pastén analyses the effects of prudential policies "on the various components of the ex post incentives of an authority" to implement a bailout during a crisis.

"Liquid