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The Economics of Money, Banking and Financial Markets plus MyEconLab plus eBook 1-semester Student Access Kit

by
Edition:
8th
ISBN13:

9780321357946

ISBN10:
0321357949
Format:
Package
Pub. Date:
1/1/2007
Publisher(s):
Addison Wesley
List Price: $180.00

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Summary

In August 2006, we are launching a new, streamlined version of MyEconLab to better fit the needs of both students and professors. Order the ISBN above if your course begins before 8/1/06, or click here if your course begins after 8/1/06. This market-leading text provides the most authoritative, applications-rich coverage of key concepts, models, and issues in money and banking. Frederic Mishkin previously held the post as Executive Vice President and Director of Research at the Federal Reserve Bank of New York. His writing style, latest research, and discussion of policy issues keep his text as the forefront of money and banking. the 7th edition update comprehensively brings the data in the text, figures, tables and boxes up to date through early 2005.

Table of Contents

PART I Introduction
1(58)
Why Study Money, Banking, and Financial Markets?
3(20)
Preview
3(1)
Why Study Financial Markets?
3(4)
The Bond Market and Interest Rates
3(2)
The Stock Market
5(1)
The Foreign Exchange Market
5(2)
Why Study Banking and Financial Institutions?
7(1)
Structure of the Financial System
7(1)
Banks and Other Financial Institutions
8(1)
Financial Innovation
8(1)
Why Study Money and Monetary Policy?
8(5)
Money and Business Cycles
9(1)
Money and Inflation
10(2)
Money and Interest Rates
12(1)
Conduct of Monetary Policy
12(1)
Fiscal Policy and Monetary Policy
12(1)
How We Will Study Money, Banking, and Financial Markets
13(4)
Exploring the Web
14(3)
Concluding Remarks
17(1)
Summary, Key Terms, Questions and Problems, and Web Exercises
17(3)
Appendix to Chapter 1 Defining Aggregate Output, Income, the Price Level, and the Inflation Rate
20(1)
Aggregate Output and Income
20(1)
Real Versus Nominal Magnitudes
20(1)
Aggregate Price Level
21(1)
Growth Rates and the Inflation Rate
22(1)
An Overview of the Financial System
23(21)
Preview
23(1)
Function of Financial Markets
23(2)
Structure of Financial Markets
25(3)
Debt and Equity Markets
25(1)
Primary and Secondary Markets
26(1)
Exchanges and Over-the-Counter Markets
27(1)
Money and Capital Markets
27(1)
Internationalization of Financial Markets
28(1)
International Bond Market, Eurobonds, and Eurocurrencies
28(1)
World Stock Markets
29(1)
Function of Financial Intermediaries
29(1)
Transaction Costs
29(1)
Foreign Stock Market Indexes
30(1)
Box 1 Global: The Importance of Financial Intermediaries to Securities Markets: An International Comparison
31(3)
Risk Sharing
31(1)
Asymmetric Information: Adverse Selection and Moral Hazard
32(2)
Financial Intermediaries
34(3)
Depository Institutions
34(1)
Contractual Savings Institutions
35(2)
Investment Intermediaries
37(1)
Regulation of the Financial System
37(4)
Increasing Information Available to Investors
39(1)
Ensuring the Soundness of Financial Intermediaries
39(1)
Financial Regulation Abroad
40(1)
Summary, Key Terms, Questions and Problems, and Web Exercises
41(3)
What Is Money?
44(15)
Preview
44(1)
Meaning of Money
44(1)
Functions of Money
45(3)
Medium of Exchange
45(1)
Unit of Account
46(1)
Store of Value
47(1)
Evolution of the Payments System
48(1)
Commodity Money
48(1)
Fiat Money
48(1)
Checks
48(1)
Box 1 Global: Birth of the Euro: Will It Benefit Europe?
49(1)
Electronic Payment
50(1)
Box 2 E-Finance: Why Are Scandinavians So Far Ahead of Americans in Using Electronic Payments?
50(1)
E-Money
51(1)
Measuring Money
51(1)
The Federal Reserve's Monetary Aggregates
51(1)
Box 3 E-Finance: Are We Headed for a Cashless Society?
52(2)
Following the Financial News: The Monetary Aggregates
54(1)
How Reliable Are the Money Data?
55(1)
Summary, Key Terms, Questions and Problems, and Web Exercises
56(3)
PART II Financial Markets
59(108)
Understanding Interest Rates
61(24)
Preview
61(1)
Measuring Interest Rates
61(8)
Present Value
61(2)
Four Types of Credit Market Instruments
63(1)
Yield to Maturity
64(5)
Box 1 Global: Negative T-Bill Rates? Japan Shows the Way
69(1)
Other Measures of Interest Rates
69(3)
Current Yield
70(1)
Yield on a Discount Basis
71(1)
Application: Reading the Wall Street Journal: The Bond Page
72(1)
Following the Financial News: Bond Prices and Interest Rates
73(2)
The Distinction Between Interest Rates and Returns
75(4)
Maturity and the Volatility of Bond Returns: Interest-Rate Risk
78(1)
Box 2 Helping Investors to Select Desired Interest-Rate Risk
79(1)
Summary
79(1)
The Distinction Between Real and Nominal Interest Rates
79(3)
Box 3 With Tips, Real Interest Rates Have Become Observable in the United States
82(1)
Summary, Key Terms, Questions and Problems, and Web Exercises
82(3)
The Behavior of Interest Rates
85(35)
Preview
85(1)
Determinants of Asset Demand
85(2)
Wealth
86(1)
Expected Returns
86(1)
Risk
87(1)
Liquidity
87(1)
Theory of Asset Demand
87(1)
Supply and Demand in the Bond Market
87(6)
Demand Curve
88(2)
Supply Curve
90(1)
Market Equilibrium
90(1)
Supply and Demand Analysis
91(1)
Loanable Funds Framework
91(2)
Changes in Equilibrium Interest Rates
93(6)
Shifts in the Demand for Bonds
93(4)
Shifts in the Supply of Bonds
97(2)
Application: Changes in the Equilibrium Interest Rate Due to Expected Inflation or Business Cycle Expansions
99(4)
Changes in Expected Inflation: The Fisher Effect
99(1)
Business Cycle Expansion
100(3)
Application: Explaining Low Japanese Interest Rates
103(1)
Application: Reading the Wall Street Journal ``Credit Markets'' Column
103(1)
Following the Financial News: The ``Credit Markets'' Column
104(1)
Supply and Demand in the Market for Money: The Liquidity Preference Framework
105(2)
Changes in Equilibrium Interest Rates in the Liquidity Reference Framework
107(1)
Shifts in the Demand for Money
107(1)
Shifts in the Supply of Money
108(1)
Application: Changes in the Equilibrium Interest Rate Due to Changes in Income, the Price Level, or the Money Supply
108(3)
Changes in Income
108(1)
Changes in the Price Level
108(1)
Changes in the Money Supply
109(2)
Following the Financial News: Forecasting Interest Rates
111(1)
Application: Money and Interest Rates
112(5)
Does a Higher Rate of Growth of the Money Supply Lower Interest Rates?
114(3)
Summary, Key Terms, Questions and Problems, and Web Exercises
117(3)
The Risk and Term Structure of Interest Rates
120(21)
Preview
120(1)
Risk Structure of Interest Rates
120(4)
Default Risk
120(4)
Application: The Enron Bankruptcy and the Baa-Aaa Spread
124(3)
Liquidity
125(1)
Income Tax Considerations
125(2)
Summary
127(1)
Application: Effects of the Bush Tax Cut on Bond Interest Rates
127(1)
Term Structure of Interest Rates
127(1)
Following the Financial News: Yield Curves
128(9)
Expectations Theory
129(3)
Segmented Markets Theory
132(1)
Liquidity Premium and Preferred Habitat Theories
133(3)
Evidence on the Term Structure
136(1)
Summary
137(1)
Application: Interpreting Yield Curves, 1980-2003
137(1)
Summary, Key Terms, Questions and Problems, and Web Exercises
138(3)
The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis
141(26)
Preview
141(1)
Computing the Price of Common Stock
141(3)
The One-Period Valuation Model
142(1)
The Generalized Dividend Valuation Model
143(1)
The Gordon Growth Model
143(1)
How the Market Sets Security Prices
144(2)
Application: Monetary Policy and Stock Prices
146(1)
Application: The September 11 Terrorist Attacks, the Enron Scandal, and the Stock Market
146(1)
The Theory of Rational Expectations
147(3)
Formal Statement of the Theory
148(1)
Rationale Behind the Theory
149(1)
Implications of the Theory
149(1)
The Efficient Markets Hypothesis: Rational Expectations in Financial Markets
150(3)
Rationale Behind the Hypothesis
151(1)
Stronger Version of the Efficient Market Hypothesis
152(1)
Evidence on the Efficient Market Hypothesis
153(2)
Evidence in Favor of Market Efficiency
153(2)
Application: Should Foreign Exchange Rates Follow a Random Walk?
155(3)
Evidence Against Market Efficiency
156(2)
Overview of the Evidence on the Efficient Market Hypothesis
158(1)
Application: Practical Guide to Investing in the Stock Market
158(1)
How Valuable Are Published Reports by Investment Advisers?
158(1)
Following the Financial News: Stock Prices
159(1)
Box 1 Should You Hire an Ape as Your Investment Adviser?
160(2)
Should You Be Skeptical of Hot Tips?
160(1)
Do Stock Prices Always Rise When There Is Good News?
161(1)
Efficient Market Prescription for the Investor
161(1)
Evidence on Rational Expectations in Other Markets
162(1)
Application: What Do the Black Monday Crash of 1987 and the Tech Crash of 2000 Tell Us About Rational Expectations and Efficient Markets?
163(1)
Summary, Key Terms, Questions and Problems, and Web Exercises
164(3)
PART III Financial Institutions
167(166)
An Economic Analysis of Financial Structure
169(32)
Preview
169(1)
Basic Puzzles About Financial Structure Throughout the World
169(4)
Transaction Costs
173(1)
How Transaction Costs Influence Financial Structure
173(1)
How Financial Intermediaries Reduce Transaction Costs
173(1)
Asymmetric Information: Adverse Selection and Moral Hazard
174(1)
The Lemons Problem: How Adverse Selection Influences Financial Structure
175(3)
Lemons in the Stock and Bond Markets
175(1)
Tools to Help Solve Adverse Selection Problems
176(2)
Box 1 The Enron Implosion and the Arthur Andersen Conviction
178(2)
How Moral Hazard Affects the Choice Between Debt and Equity Contracts
180(3)
Moral Hazard in Equity Contracts: The Principal--Agent Problem
181(1)
Tools to Help Solve the Principal-Agent Problem
182(1)
Box 2 E-Finance: Venture Capitalists and the High-Tech Sector
183(1)
How Moral Hazard Influences Financial Structure in Debt Markets
184(3)
Tools to Help Solve Moral Hazard in Debt Contracts
184(2)
Summary
186(1)
Application: Financial Development and Economic Growth
187(2)
Financial Crises and Aggregate Economic Activity
189(2)
Factors Causing Financial Crises
189(2)
Application: Financial Crises in the United States
191(3)
Box 3 Case Study of a Financial Crisis: The Great Depression
194(1)
Application: Financial Crises in Emerging-Market Countries: Mexico, 1994--1995; East Asia, 1997--1998; and Argentina, 2001--2002
194(5)
Summary, Key Terms, Questions and Problems, and Web Exercises
199(2)
Banking and the Management of Financial Institutions
201(28)
Preview
201(1)
The Bank Balance Sheet
201(4)
Liabilities
201(3)
Assets
204(1)
Basic Banking
205(3)
General Principles of Bank Management
208(7)
Liquidity Management and the Role of Reserves
208(3)
Asset Management
211(1)
Liability Management
212(1)
Capital Adequacy Management
213(2)
Application: Strategies for Managing Bank Capital
215(1)
Application: Did the Capital Crunch Cause a Credit Crunch in the Early 1990s?
216(1)
Managing Credit Risk
217(3)
Screening and Monitoring
217(1)
Long-Term Customer Relationships
218(1)
Loan Commitments
219(1)
Collateral and Compensating Balances
219(1)
Credit Rationing
220(1)
Managing Interest-Rate Risk
220(2)
Gap and Duration Analysis
221(1)
Application: Strategies for Managing Interest-Rate Risk
222(1)
Off-Balance-Sheet Activities
223(2)
Loan Sales
223(1)
Generation of Fee Income
223(1)
Trading Activities and Risk Management Techniques
224(1)
Box 1 Global: Barings, Daiwa, Sumitomo, and Allied Irish: Rogue Traders and the Principal--Agent Problem
225(1)
Summary, Key Terms, Questions and Problems, and Web Exercises
226(3)
Banking Industry: Structure and Competition
229(31)
Preview
229(1)
Historical Development of the Banking System
229(3)
Multiple Regulatory Agencies
231(1)
Financial Innovation and the Evolution of the Banking Industry
232(4)
Responses to Changes in Demand Conditions: Interest Rate Volatility
233(1)
Responses to Changes in Supply Conditions: Information Technology
234(2)
Box 1 E-Finance: Will ``Clicks'' Dominate ``Bricks'' in the Banking Industry?
236(7)
Avoidance of Existing Regulations
237(2)
Financial Innovation and the Decline of Traditional Banking
239(4)
Structure of the U.S. Commercial Banking Industry
243(2)
Restrictions on Branching
244(1)
Response to Branching Restrictions
245(1)
Bank Consolidation and Nationwide Banking
245(2)
Box 2 E-Finance: Information Technology and Bank Consolidation
247(2)
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
248(1)
What Will the Structure of the U.S. Banking Industry Look Like in the Future?
248(1)
Box 3 Global: Comparison of Banking Structure in the United States and Abroad
249(1)
Are Bank Consolidation and Nationwide Banking Good Things?
249(1)
Separation of the Banking and Other Financial Service Industries
250(2)
Erosion of Glass-Steagall
250(1)
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999: Repeal of Glass-Steagall
251(1)
Implications for Financial Consolidation
251(1)
Separation of Banking and Other Financial Services Industries Throughout the World
251(1)
Thrift Industry: Regulation and Structure
252(1)
Savings and Loan Associations
252(1)
Mutual Savings Banks
253(1)
Credit Unions
253(1)
International Banking
253(2)
Eurodollar Market
254(1)
Box 4 Global: Ironic Birth of the Eurodollar Market
255(2)
Structure of U.S. Banking Overseas
255(1)
Foreign Banks in the United States
256(1)
Summary, Key Terms, Questions and Problems, and Web Exercises
257(3)
Economic Analysis of Banking Regulation
260(27)
Preview
260(1)
Asymmetric Information and Banking Regulation
260(2)
Government Safety Net: Deposit Insurance and the FDIC
260(2)
Box 1 Global: The Spread of Government Deposit Insurance Throughout the World: Is This a Good Thing?
262(4)
Restrictions on Asset Holdings and Bank Capital Requirements
264(1)
Bank Supervision: Chartering and Examination
265(1)
Box 2 Global: Basel 2: Is It Spinning Out of Control?
266(4)
Assessment of Risk Management
267(1)
Disclosure Requirements
268(1)
Consumer Protection
269(1)
Restrictions on Competition
269(1)
Box 3 E-Finance: Electronic Banking: New Challenges for Bank Regulation
270(2)
International Banking Regulation
272(1)
Problems in Regulating International Banking
272(1)
Summary
272(1)
The 1980s U.S. Banking Crisis: Why?
273(3)
Early Stages of the Crisis
274(1)
Later Stages of the Crisis: Regulatory Forbearance
275(1)
Competitive Equality in Banking Act of 1987
276(1)
Political Economy of the Savings and Loan Crisis
276(2)
The Principal-Agent Problem for Regulators and Politicians
277(1)
Savings and Loan Bailout: The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
278(1)
Federal Deposit Insurance Corporation Improvement Act of 1991
279(1)
Banking Crises Throughout the World
280(4)
Scandinavia
280(1)
Latin America
281(1)
Russia and Eastern Europe
282(1)
Japan
282(2)
East Asia
284(1)
``Deja Vu All Over Again''
284(1)
Summary, Key Terms, Questions and Problems, and Web Exercises
284(3)
Nonbank Finance
287(22)
Preview
287(1)
Insurance
287(3)
Life Insurance
287(1)
Property and Casualty Insurance
288(2)
The Competitive Threat from the Banking Industry
290(1)
Application: Insurance Management
290(4)
Screening
291(1)
Risk-Based Premiums
291(1)
Restrictive Provisions
292(1)
Prevention of Fraud
292(1)
Cancellation of Insurance
292(1)
Deductibles
292(1)
Coinsurance
293(1)
Limits on the Amount of Insurance
293(1)
Summary
293(1)
Pension Funds
294(2)
Private Pension Plans
295(1)
Public Pension Plans
295(1)
Box 1 Should Social Security Be Privatized?
296(1)
Finance Companies
296(1)
Mutual Funds
297(1)
Box 2 E-Finance: Mutual Funds and the Internet
298(2)
Money Market Mutual Funds
299(1)
Hedge Funds
299(1)
Box 3 The Long-Term Capital Management Debacle
300(1)
Government Financial Intermediation
301(1)
Federal Credit Agencies
301(1)
Box 4 Are Fannie Mae and Freddie Mac Getting Too Big for Their Britches?
302(1)
Securities Market Operations
302(2)
Investment Banking
303(1)
Following the Financial News: New Securities Issues
304(1)
Securities Brokers and Dealers
304(1)
Organized Exchanges
305(1)
Box 5 The Return of the Financial Supermarket?
305(1)
Box 6 E-Finance: The Internet Comes to Wall Street
306(1)
Summary, Key Terms, Questions and Problems, and Web Exercises
306(3)
Financial Derivatives
309(24)
Preview
309(1)
Hedging
309(1)
Interest-Rate Forward Contracts
310(1)
Application: Hedging with Interest-Rate Forward Contracts
310(1)
Pros and Cons of Forward Contracts
311(1)
Financial Futures Contracts and Markets
311(1)
Financial Futures
312(2)
Application: Hedging with Financial Futures
314(5)
Organization of Trading in Financial Futures Markets
315(2)
The Globalization of Financial Futures Markets
317(1)
Explaining the Success of Futures Markets
317(2)
Application: Hedging Foreign Exchange Risk
319(1)
Hedging Foreign Exchange Risk with Forward Contracts
319(1)
Hedging Foreign Exchange Risk with Futures Contracts
320(1)
Options
320(1)
Futures Options
321(4)
Option Contracts
322(1)
Profits and Losses on Option and Futures Contracts
322(3)
Application: Hedging with Futures Options
325(3)
Factors Affecting the Prices of Option Premiums
326(1)
Summary
327(1)
Interest-Rate Swaps
328(1)
Interest-Rate Swap Contracts
328(1)
Application: Hedging with Interest-Rate Swaps
329(1)
Advantages of Interest-Rate Swaps
329(1)
Disadvantages of Interest-Rate Swaps
330(1)
Financial Intermediaries in Interest-Rate Swaps
330(1)
Summary, Key Terms, Questions and Problems, and Web Exercises
330(3)
PART IV Central Banking and the Conduct of Monetary Policy
333(100)
Structure of Central Banks and the Federal Reserve System
335(22)
Preview
335(1)
Origins of the Federal Reserve System
335(1)
Box 1 Inside the Fed: The Political Genius of the Founders of the Federal Reserve System
336(1)
Formal Structure of the Federal Reserve System
336(3)
Federal Reserve Banks
337(2)
Box 2 Inside the Fed: The Special Role of the Federal Reserve Bank of New York
339(3)
Member Banks
340(1)
Board of Governors of the Federal Reserve System
340(1)
Federal Open Market Committee (FOMC)
341(1)
Box 3 Inside the Fed: The Role of the Research Staff
342(2)
The FOMC Meeting
343(1)
Box 4 Inside the Fed: Green, Blue, and Beige: What Do These Colors Mean at the Fed?
344(1)
Informal Structure of the Federal Reserve System
344(2)
Box 5 Inside the Fed: The Role of Member Banks in the Federal Reserve System
346(1)
How Independent Is the Fed?
346(3)
Structure and Independence of Foreign Central Banks
349(2)
Bank of Canada
349(1)
Bank of England
349(1)
Bank of Japan
350(1)
European Central Bank
350(1)
The Trend Toward Greater Independence
351(1)
Explaining Central Bank Behavior
351(1)
Box 6 Inside the Fed: Federal Reserve Transparency
352(1)
Should the Fed Be Independent?
352(3)
The Case for Independence
352(2)
The Case Against Independence
354(1)
Central Bank Independence and Macroeconomic Performance Throughout the World
354(1)
Summary, Key Terms, Questions and Problems, and Web Exercises
355(2)
Multiple Deposit Creation and the Money Supply Process
357(17)
Preview
357(1)
Four Players in the Money Supply Process
357(1)
The Fed's Balance Sheet
358(1)
Liabilities
358(1)
Assets
359(1)
Control of the Monetary Base
359(4)
Federal Reserve Open Market Operations
359(4)
Shifts from Deposits into Currency
363(1)
Box 1 Global: Foreign Exchange Rate Intervention and the Monetary Base
363(2)
Discount Loans
364(1)
Other Factors That Affect the Monetary Base
365(1)
Overview of the Fed's Ability to Control the Monetary Base
365(1)
Multiple Deposit Creation: A Simple Model
365(7)
Deposit Creation: The Single Bank
366(1)
Deposit Creation: The Banking System
367(3)
Deriving the Formula for Multiple Deposit Creation
370(1)
Critique of the Simple Model
371(1)
Summary, Key Terms, Questions and Problems, and Web Exercises
372(2)
Determinants of the Money Supply
374(19)
Preview
374(1)
The Money Supply Model and the Money Multiplier
375(3)
Deriving the Money Multiplier
375(2)
Intuition Behind the Money Multiplier
377(1)
Factors that Determine the Money Multiplier
378(3)
Changes in the Required Reserve Ratio r
378(1)
Changes in the Currency Ratio c
379(1)
Changes in the Excess Reserves Ratio e
379(2)
Additional Factors That Determine the Money Supply
381(2)
Changes in the Nonborrowed Monetary Base MBn
382(1)
Changes in the Discount Loans DL from the Fed
382(1)
Overview of the Money Supply Process
383(1)
Application: Explaining Movements in the Money Supply, 1980--2002
384(3)
Application: The Great Depression Bank Panics, 1930--1933
387(3)
Summary, Key Terms, Questions and Problems, and Web Exercises
390(3)
Tools of Monetary Policy
393(18)
Preview
393(1)
The Market for Reserves and the Federal Funds Rate
393(5)
Supply and Demand in the Market for Reserves
394(1)
How Changes in the Tools of Monetary Policy Affect the Federal Funds Rate
395(3)
Open Market Operations
398(2)
A Day at the Trading Desk
398(2)
Advantages of Open Market Operations
400(1)
Discount Policy
400(3)
Operation of the Discount Window
401(1)
Lender of Last Resort
402(1)
Advantages and Disadvantages of Discount Policy
403(1)
Reserve Requirements
403(1)
Box 1 Inside the Fed: Discounting to Prevent a Financial Panic: The Black Monday Stock Market Crash of 1987 and the Terrorist Destruction of the World Trade Center in September 2001
404(2)
Advantages and Disadvantages of Reserve Requirement Changes
405(1)
Application: Why Have Reserve Requirements Been Declining Worldwide?
406(1)
Application: The Channel/Corridor System for Setting Interest Rates Used in Other Countries
406(2)
Summary, Key Terms, Questions and Problems, and Web Exercises
408(3)
Conduct of Monetary Policy: Goals and Targets
411(22)
Preview
411(1)
Goals of Monetary Policy
411(2)
High Employment
411(1)
Economic Growth
412(1)
Price Stability
412(1)
Box 1 Global: The Growing European Commitment to Price Stability
413(1)
Interest-Rate Stability
413(1)
Stability of Financial Markets
413(1)
Stability in Foreign Exchange Markets
414(1)
Conflict Among Goals
414(1)
Central Bank Strategy: Use of Targets
414(2)
Choosing the Targets
416(3)
Criteria for Choosing Intermediate Targets
418(1)
Criteria for Choosing Operating Targets
419(1)
Fed Policy Procedures: Historical Perspective
419(2)
The Early Years: Discount Policy as the Primary Tool
420(1)
Discovery of Open Market Operations
420(1)
The Great Depression
421(1)
Box 2 Inside the Fed: Bank Panics of 1930--1933: Why Did the Fed Let Them Happen?
421(7)
Reserve Requirements as a Policy Tool
422(1)
War Finance and the Pegging of Interest Rates: 1942--1951
422(1)
Targeting Money Market Conditions: The 1950s and 1960s
423(1)
Targeting Monetary Aggregates: The 1970s
424(1)
New Fed Operating Procedures: October 1979--October 1982
425(1)
De-emphasis of Monetary Aggregates: October 1982-Early 1990s
426(1)
Federal Funds Targeting Again: Early 1990s and Beyond
427(1)
International Considerations
427(1)
Box 3 Global: International Policy Coordination: The Plaza Agreement and the Louvre Accord
428(1)
The Taylor Rule, Nairu, and the Philips Curve
428(2)
Box 4 Fed Watching
430(1)
Summary, Key Terms, Questions and Problems, and Web Exercises
431(2)
PART V International Finance and Monetary Policy
433(82)
The Foreign Exchange Market
435(27)
Preview
435(1)
Foreign Exchange Market
435(2)
What Are Foreign Exchange Rates?
436(1)
Foreign Exchange Rates
437(2)
Why Are Exchange Rates Important?
438(1)
How Is Foreign Exchange Traded?
438(1)
Exchange Rates in the Long Run
439(4)
Law of One Price
439(1)
Theory of Purchasing Power Parity
439(1)
Why the Theory of Purchasing Power Parity Cannot Fully Explain Exchange Rates
440(1)
Factors That Affect Rates in the Long Run
441(2)
Exchange Rates in the Short Run
443(5)
Comparing Expected Returns on Domestic and Foreign Deposits
443(2)
Interest Parity Condition
445(1)
Equilibrium in the Foreign Exchange Market
446(2)
Explaining Changes in Exchange Rates
448(4)
Shifts in the Expected-Return Schedule for Foreign Deposits
448(2)
Shifts in the Expected-Return Schedule for Domestic Deposits
450(2)
Application: Changes in the Equilibrium Exchange Rate: Two Examples
452(3)
Changes in Interest Rates
452(1)
Changes in the Money Supply
453(1)
Exchange Rate Overshooting
453(2)
Application: Why Are Exchange Rates So Volatile?
455(1)
Application: The Dollar and Interest Rates, 1973--2002
455(2)
Application: The Euro's First Four Years
457(1)
Application: Reading the Wall Street Journal: The ``Currency Trading'' Column
457(1)
Following the Financial News: The ``Currency Trading'' Column
458(1)
Summary, Key Terms, Questions and Problems, and Web Exercises
459(3)
The International Financial System
462(25)
Preview
462(1)
Intervention in the Foreign Exchange Market
462(1)
Foreign Exchange Intervention and the Money Supply
462(1)
Box 1 Inside the Fed: A Day at the Federal Reserve Bank of New York's Foreign Exchange Desk
463(4)
Unsterilized Intervention
465(1)
Sterilized Intervention
466(1)
Balance of Payments
467(1)
Evolution of the International Financial System
468(3)
Gold Standard
469(1)
Bretton Woods System
469(2)
Box 2 Global: The Euro's Challenge to the Dollar
471(4)
Managed Float
473(1)
European Monetary System (EMS)
474(1)
Application: The Foreign Exchange Crisis of September 1992
475(2)
Application: Recent Foreign Exchange Crises in Emerging Market Countries: Mexico 1994, East Asia 1997, Brazil 1999, and Argentina 2002
477(1)
Capital Controls
478(1)
Controls on Capital Outflows
478(1)
Controls on Capital Inflows
479(1)
The Role of the IMF
479(3)
Should the IMF Be an International Lender of Last Resort?
480(2)
International Considerations and Monetary Policy
482(2)
Direct Effects of the Foreign Exchange Market on the Money Supply
482(1)
Balance-of-Payments Considerations
483(1)
Exchange Rate Considerations
483(1)
Summary, Key Terms, Questions and Problems, and Web Exercises
484(3)
Monetary Policy Strategy: The International Experience
487(28)
Preview
487(1)
The Role of a Nominal Anchor
487(2)
The Time-Consistency Problem
488(1)
Exchange-Rate Targeting
489(5)
Advantages of Exchange-Rate Targeting
489(1)
Disadvantages of Exchange-Rate Targeting
490(2)
When Is Exchange-Rate Targeting Desirable for Industrialized Countries?
492(1)
When Is Exchange-Rate Targeting Desirable for Emerging Market Countries?
492(1)
Currency Boards
492(1)
Dollarization
493(1)
Box 1 Global: Argentina's Currency Board
494(2)
Monetary Targeting
496(2)
Monetary Targeting in Canada, the United Kingdom, Japan, Germany, and Switzerland
496(2)
Box 2 Global: The European Central Bank's Monetary Policy Strategy
498(3)
Advantages of Monetary Targeting
500(1)
Disadvantages of Monetary Targeting
501(1)
Inflation Targeting
501(8)
Inflation Targeting in New Zealand, Canada, and the United Kingdom
501(3)
Advantages of Inflation Targeting
504(2)
Disadvantages of Inflation Targeting
506(2)
Nominal GDP Targeting
508(1)
Monetary Policy with an Implicit Nominal Anchor
509(3)
Advantages of the Fed's Approach
510(1)
Disadvantages of the Fed's Approach
510(2)
Summary, Key Terms, Questions and Problems, and Web Exercises
512(3)
PART VI Monetary Theory
515
The Demand for Money
517(19)
Preview
517(1)
Quantity Theory of Money
517(3)
Velocity of Money and Equation of Exchange
518(1)
Quantity Theory
519(1)
Quantity Theory of Money Demand
519(1)
Is Velocity a Constant?
520(1)
Keynes's Liquidity Preference Theory
521(3)
Transactions Motive
521(1)
Precautionary Motive
522(1)
Speculative Motive
522(1)
Putting the Three Motives Together
523(1)
Further Developments in the Keynesian Approach
524(4)
Transactions Demand
524(3)
Precautionary Demand
527(1)
Speculative Demand
527(1)
Friedman's Modern Quantity Theory of Money
528(2)
Distinguishing Between the Friedman and Keynesian Theories
530(2)
Empirical Evidence on the Demand for Money
532(1)
Interest Rates and Money Demand
533(1)
Stability of Money Demand
533(1)
Summary, Key Terms, Questions and Problems, and Web Exercises
533(3)
The Keynesian Framework and the Islm Model
536(25)
Preview
536(1)
Determination of Aggregate Output
536(4)
Consumer Expenditure and the Consumption Function
538(1)
Investment Spending
539(1)
Box 1 Meaning of the Word Investment
540(5)
Equilibrium and the Keynesian Cross Diagram
540(2)
Expenditure Multiplier
542(3)
Application: The Collapse of Investment Spending and the Great Depression
545(6)
Government's Role
545(3)
Role of International Trade
548(1)
Summary of the Determinants of Aggregate Output
548(3)
The ISLM Model
551(6)
Equilibrium in the Goods Market: The IS Curve
552(3)
Equilibrium in the Market for Money: The LM Curve
555(2)
ISLM Approach to Aggregate Output and Interest Rates
557(1)
Summary, Key Terms, Questions and Problems, and Web Exercises
558(3)
Monetary and Fiscal Policy in the Islm Model
561(21)
Preview
561(1)
Factors That Cause the IS Curve to Shift
561(3)
Factors That Cause the LM Curve to Shift
564(2)
Changes in Equilibrium Level of the Interest Rate and Aggregate Output
566(2)
Response to a Change in Monetary Policy
566(1)
Response to a Change in Fiscal Policy
567(1)
Effectiveness of Monetary Versus Fiscal Policy
568(3)
Monetary Policy Versus Fiscal Policy: The Case of Complete Crowding Out
568(3)
Application: Targeting Money Supply Versus Interest Rates
571(4)
ISLM Model in the Long Run
575(2)
ISLM Model and the Aggregate Demand Curve
577(3)
Deriving the Aggregate Demand Curve
577(1)
Factors That Cause the Aggregate Demand Curve to Shift
578(2)
Summary, Key Terms, Questions and Problems, and Web Exercises
580(2)
Aggregate Demand and Supply Analysis
582(21)
Preview
582(1)
Aggregate Demand
582(1)
Monetarist View of Aggregate Demand
582(1)
Aggregate Output, Unemployment, and the Price Level
583(4)
Keynesian View of Aggregate Demand
585(1)
The Crowding-Out Debate
586(1)
Aggregate Supply
587(1)
Shifts in the Aggregate Supply Curve
588(1)
Equilibrium in Aggregate Supply and Demand Analysis
588(10)
Equilibrium in the Short Run
589(1)
Equilibrium in the Long Run
589(3)
Shifts in Aggregate Demand
592(2)
Shifts in Aggregate Supply
594(2)
Shifts in the Long-Run Aggregate Supply Curve: Real Business Cycle Theory and Hysteresis
596(1)
Conclusions
597(1)
Application: Explaining Past Business Cycle Episodes
598(2)
Vietnam War Buildup, 1964--1970
598(1)
Negative Supply Shocks, 1973--1975 and 1978--1980
598(1)
Favorable Supply Shocks, 1995--1999
599(1)
Summary, Key Terms, Questions and Problems, and Web Exercises
600(3)
Transmission Mechanisms of Monetary Policy: The Evidence
603(29)
Preview
603(1)
Framework for Evaluating Empirical Evidence
603(3)
Structural Model Evidence
604(1)
Reduced-Form Evidence
604(1)
Advantages and Disadvantages of Structural Model Evidence
605(1)
Advantages and Disadvantages of Reduced-Form Evidence
606(1)
Box 1 Perils of Reverse Causation: A Russian Folk Tale
606(1)
Box 2 Perils of Ignoring an Outside Driving Factor: How to Lose a Presidential Election
607(1)
Conclusions
607(1)
Early Keynesian Evidence on the Importance of Money
607(4)
Objections to Early Keynesian Evidence
608(3)
Early Monetarist Evidence on the Importance of Money
611(4)
Timing Evidence
611(2)
Statistical Evidence
613(2)
Historical Evidence
615(1)
Overview of the Monetarist Evidence
615(1)
Box 3 Real Business Cycle Theory and the Debate on Money and Economic Activity
616(1)
Transmission Mechanisms of Monetary Policy
616(8)
Traditional Interest-Rate Channels
617(1)
Other Asset Price Channels
618(3)
Credit View
621(3)
Box 4 Consumers' Balance Sheets and the Great Depression
624(1)
Why Are Credit Channels Likely to Be Important?
625(1)
Application: Corporate Scandals and the Slow Recovery from the March 2001 Recession
625(1)
Lessons for Monetary Policy
626(2)
Application: Applying the Monetary Policy Lessons to Japan
628(1)
Summary, Key Terms, Questions and Problems, and Web Exercises
629(3)
Money and Inflation
632(26)
Preview
632(1)
Money and Inflation: Evidence
632(2)
German Hyperinflation, 1921--1923
633(1)
Recent Episodes of Rapid Inflation
633(1)
Meaning of Inflation
634(1)
Views of Inflation
635(3)
Monetarist View
635(1)
Keynesian View
636(2)
Summary
638(1)
Origins of Inflationary Monetary Policy
638(8)
High Employment Targets and Inflation
639(4)
Budget Deficits and Inflation
643(3)
Application: Explaining the Rise in U.S. Inflation, 1960--1980
646(4)
Activist/Nonactivist Policy Debate
650(4)
Responses to High Unemployment
650(1)
Activist and Nonactivist Positions
651(1)
Expectations and the Activist/Nonactivist Debate
652(2)
Box 1 Perils of Accommodating Policy: The Terrorism Dilemma
654(1)
Rules Versus Discretion: Conclusions
654(1)
Application: Importance of Credibility to Volcker's Victory over Inflation
655(1)
Summary, Key Terms, Questions and Problems, and Web Exercises
655(3)
Rational Expectations: Implications For Policy
658
Preview
658(1)
The Lucas Critique of Policy Evaluation
659(1)
Econometric Policy Evaluation
659(1)
Example: The Term Structure of Interest Rates
659(1)
New Classical Macroeconomic Model
660(3)
Effects of Unanticipated and Anticipated Policy
661(2)
Box 1 Proof of the Policy Ineffectiveness Proposition
663(2)
Can an Expansionary Policy Lead to a Decline in Aggregate Output?
663(1)
Implications for Policymakers
664(1)
New Keynesian Model
665(1)
Effects of Unanticipated and Anticipated Policy
666(1)
Implications for Policymakers
666(1)
Comparison of the Two New Models with the Traditional Model
666(8)
Short-Run Output and Price Responses
668(2)
Stabilization Policy
670(1)
Anti-inflation Policies
671(2)
Credibility in Fighting Inflation
673(1)
Box 2 Global: Ending the Bolivian Hyperinflation: Case Study of a Successful Anti-inflation Program
674(1)
Application: Credibility and the Reagan Budget Deficits
675(1)
Impact of the Rational Expectations Revolution
676(1)
Summary, Key Terms, Questions and Problems, and Web Exercises
677
Glossary 1(1)
Answers To Selected Questions and Problems 1(1)
Credits 1(1)
Index 1


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