Banks' ability to create new deposits can stabilize asset prices.
Banks play a crucial role in providing liquidity to the financial market. They can create and lend new deposits without needing to borrow from the central bank, which helps meet the economy's liquidity needs. Non-bank investment funds may increase asset price volatility when trying to provide more liquidity insurance. Banks can reduce this volatility by providing new inside money. The interest rate policy can impact asset prices by affecting banks' liquidity constraints.