Banking System Fragility and Monetary Policy

Effective struggle against the existing financial fragility would solve the key problem of the onset of destructive global financial crises that exist throughout history. The main cause of fragility consists of many risk factors, yet this paper considers risk associated with exchange rate uncertainty. This topic is especially relevant during close international interconnections of economies. The purpose of my paper is to identify the most effective monetary instruments which allow to decrease fragility of the financial system connected with the exchange risks. Mathematical modeling and programming methods enable to evaluate the effects of various monetary instruments and help to answer the important question: whether the limitations of the financial system can effectively cope with fragility. The first Chapter of the paper contains an analysis of existing research on this topic. The second Chapter is devoted to the search for a general equilibrium in theoretical model of the financial sector in different conditions of uncertainty. The third Chapter consist of the calibration of the theoretical model, proof of financial fragility and analysis of the influence of various monetary instruments in the equilibrium. At the end of the study, the main conclusions about the effectiveness of monetary policy in the fight against banking fragility will be drawn.