The Economics Of Money, Banking, And Financial Markets, 13th Edition PDF by Frederic S Mishkin

By

The Economics Of Money, Banking, And Financial Markets, Thirteenth Edition

By Frederic S. Mishkin

The Economics Of Money, Banking, And Financial Markets, 13th Edition PDF by Frederic S Mishkin

Contents in Detail:

PART 1 Introduction 49

CHAPTER 1

Why Study Money, Banking, and Financial Markets? 50

1.1 Why Study Financial Markets? ………………………………………………………………………………….50

Debt Markets and Interest Rates ……………………………………………………………………………….51

The Stock Market …………………………………………………………………………………………………..51

1.2 Why Study Financial Institutions and Banking? ……………………………………………………..53

Structure of the Financial System ……………………………………………………………………………..54

Banks and Other Financial Institutions ………………………………………………………………………54

Financial Innovation ………………………………………………………………………………………………54

Financial Crises ……………………………………………………………………………………………………..55

1.3 Why Study Money and Monetary Policy? ………………………………………………………………55

Money and Business Cycles ……………………………………………………………………………………..55

Money and Inflation ……………………………………………………………………………………………….56

Money and Interest Rates …………………………………………………………………………………………58

Conduct of Monetary Policy …………………………………………………………………………………….58

Fiscal Policy and Monetary Policy ……………………………………………………………………………..59

1.4 Why Study International Finance? …………………………………………………………………………..60

The Foreign Exchange Market ………………………………………………………………………………….61

The International Financial System ……………………………………………………………………………62

1.5 Money, Banking, and Financial Markets and Your Career ……………………………………62

1.6 How We Will Study Money, Banking, and Financial Markets ………………………………63

Concluding Remarks ………………………………………………………………………………………………………….64

Summary 64 • Key Terms 64 • Questions 64 • Applied Problems 65 •

Data Analysis Problems 66

APPENDIX TO CHAPTER 1

Defining Aggregate Output, Income, the Price Level,

and the Inflation Rate 67

Aggregate Output and Income………………………………………………………………………………………….67

Real Versus Nominal Magnitudes…………………………………………………………………………………….67

Aggregate Price Level………………………………………………………………………………………………………….68

Growth Rates and the Inflation Rate…………………………………………………………………………………69

CHAPTER 2

An Overview of the Financial System 70

2.1 Function of Financial Markets ………………………………………………………………………………….70

2.2 Structure of Financial Markets ………………………………………………………………………………….73

Debt and Equity Markets …………………………………………………………………………………………73

Primary and Secondary Markets ……………………………………………………………………………….73

Exchanges and Over-the-Counter Markets ………………………………………………………………….74

Money and Capital Markets ……………………………………………………………………………………..75

2.3 Financial Market Instruments …………………………………………………………………………………..75

Money Market Instruments ……………………………………………………………………………………..75

Following the Financial News Money Market Rates 76

Capital Market Instruments ……………………………………………………………………………………..77

Following the Financial News Capital Market Interest Rates 78

2.4 Internationalization of Financial Markets ……………………………………………………………….79

Global Are U.S. Capital Markets Losing Their Edge? 80

International Bond Market, Eurobonds, and Eurocurrencies …………………………………………80

World Stock Markets ………………………………………………………………………………………………81

2.5 Function of Financial Intermediaries: Indirect Finance ………………………………………..81

Following the Financial News Foreign Stock Market Indexes 82

Transaction Costs …………………………………………………………………………………………………..82

Global The Importance of Financial Intermediaries Relative to Securities Markets:

An International Comparison 83

Risk Sharing ………………………………………………………………………………………………………….84

Asymmetric Information: Adverse Selection and Moral Hazard ……………………………………..84

Economies of Scope and Conflicts of Interest ……………………………………………………………..86

2.6 Types of Financial Intermediaries …………………………………………………………………………….86

Depository Institutions ……………………………………………………………………………………………86

Contractual Savings Institutions ……………………………………………………………………………….88

Investment Intermediaries ……………………………………………………………………………………….89

2.7 Regulation of the Financial System ………………………………………………………………………….90

Increasing Information Available to Investors ………………………………………………………………90

Ensuring the Soundness of Financial Intermediaries …………………………………………………….91

Financial Regulation Abroad …………………………………………………………………………………….93

Summary 93 • Key Terms 94 • Questions 94 • Applied Problems 95 •

Data Analysis Problems 96

CHAPTER 3

What Is Money? 97

3.1 Meaning of Money …………………………………………………………………………………………………….97

3.2 Functions of Money …………………………………………………………………………………………………..98

Medium of Exchange ………………………………………………………………………………………………98

Unit of Account ……………………………………………………………………………………………………..99

Store of Value ………………………………………………………………………………………………………100

3.3 Evolution of the Payments System …………………………………………………………………………101

Commodity Money ………………………………………………………………………………………………101

Fiat Money ………………………………………………………………………………………………………….101

Checks ……………………………………………………………………………………………………………….101

Electronic Payment ……………………………………………………………………………………………….102

E-Money …………………………………………………………………………………………………………….102

FYI Are We Headed for a Cashless Society? 103

APPLICATION Will Bitcoin or Other Cryptocurrencies Become

the Money of the Future?……………………………………………………………………….103

3.4 Measuring Money …………………………………………………………………………………………………….104

The Federal Reserve’s Monetary Aggregates ………………………………………………………………105

Following the Financial News The Monetary Aggregates 105

FYI Where Are All the U.S. Dollars? 106

Summary 107 • Key Terms 108 • Questions 108 • Applied Problems 109 •

Data Analysis Problems 110

PART 2 Financial Markets 111

CHAPTER 4

The Meaning of Interest Rates 112

4.1 Measuring Interest Rates …………………………………………………………………………………………112

Present Value ……………………………………………………………………………………………………….113

APPLICATION Simple Present Value ………………………………………………………………114

APPLICATION How Much Is That Jackpot Worth? ………………………………………….115

Four Types of Credit Market Instruments …………………………………………………………………115

Yield to Maturity ………………………………………………………………………………………………….116

APPLICATION Yield to Maturity on a Simple Loan ………………………………………….116

APPLICATION Yield to Maturity and the Yearly Payment on a

Fixed-Payment Loan ……………………………………………………………………………..118

APPLICATION Yield to Maturity and Bond Price for a Coupon Bond …………………119

APPLICATION Yield to Maturity on a Perpetuity ……………………………………………..121

APPLICATION Yield to Maturity on a Discount Bond ………………………………………122

4.2 The Distinction Between Interest Rates and Returns …………………………………………..123

Global Negative Interest Rates? Japan First, Then the United States,

Then Europe 124

Maturity and the Volatility of Bond Returns: Interest-Rate Risk …………………………………….126

Summary …………………………………………………………………………………………………………….127

4.3 The Distinction Between Real and Nominal Interest Rates ………………………………..128

APPLICATION Calculating Real Interest Rates …………………………………………………129

Summary 131 • Key Terms 131 • Questions 131 • Applied Problems 132 •

Data Analysis Problems 133

CHAPTER 4 APPENDIX

Measuring Interest-Rate Risk: Duration

Go to MyLab Economics

CHAPTER 5

The Behavior of Interest Rates 134

5.1 Determinants of Asset Demand ……………………………………………………………………………..134

Wealth ………………………………………………………………………………………………………………..135

Expected Returns …………………………………………………………………………………………………135

Risk ……………………………………………………………………………………………………………………135

Liquidity …………………………………………………………………………………………………………….136

Theory of Portfolio Choice …………………………………………………………………………………….136

5.2 Supply and Demand in the Bond Market ……………………………………………………………..137

Demand Curve …………………………………………………………………………………………………….137

Supply Curve ………………………………………………………………………………………………………138

Market Equilibrium ………………………………………………………………………………………………139

Supply and Demand Analysis …………………………………………………………………………………140

5.3 Changes in Equilibrium Interest Rates …………………………………………………………………..140

Shifts in the Demand for Bonds ………………………………………………………………………………140

Shifts in the Supply of Bonds …………………………………………………………………………………144

APPLICATION Changes in the Interest Rate Due to a Change in

Expected Inflation: The Fisher Effect ……………………………………………………..146

APPLICATION Changes in the Interest Rate Due to a Business Cycle Expansion….148

APPLICATION Explaining Current Low Interest Rates in Europe, Japan,

and the United States: Low Inflation and Secular Stagnation ……………………..149

5.4 Supply and Demand in the Market for Money:

The Liquidity Preference Framework ……………………………………………………………………..150

5.5 Changes in Equilibrium Interest Rates in the Liquidity

Preference Framework ……………………………………………………………………………………………..153

Shifts in the Demand for Money ……………………………………………………………………………..153

Shifts in the Supply of Money ………………………………………………………………………………..153

APPLICATION Changes in the Equilibrium Interest Rate Due to

Changes in Income, the Price Level, or the Money Supply ………………………..154

Changes in Income ……………………………………………………………………………………………….155

Changes in the Price Level ……………………………………………………………………………………..155

Changes in the Money Supply ………………………………………………………………………………..155

5.6 Money and Interest Rates ……………………………………………………………………………………….156

APPLICATION Does a Higher Rate of Growth of the

Money Supply Lower Interest Rates? ………………………………………………………158

Summary 161 • Key Terms 161 • Questions 161 • Applied Problems 162 •

Data Analysis Problems 163

CHAPTER 5 APPENDIX

Loanable Funds Framework

Go to MyLab Economics

CHAPTER 6

The Risk and Term Structure of Interest Rates 165

6.1 Risk Structure of Interest Rates ……………………………………………………………………………….165

Default Risk …………………………………………………………………………………………………………166

FYI Conflicts of Interest at Credit-Rating Agencies and the Global Financial Crisis 169

APPLICATION The Coronavirus Pandemic and the Baa–Treasury Spread ……………170

Liquidity …………………………………………………………………………………………………………….170

Income Tax Considerations ……………………………………………………………………………………171

Summary …………………………………………………………………………………………………………….172

APPLICATION Effects of the Trump Tax Cuts on Bond Interest Rates ………………..172

6.2 Term Structure of Interest Rates ……………………………………………………………………………..173

Following the Financial News Yield Curves 173

Expectations Theory ……………………………………………………………………………………………..175

Segmented Markets Theory ……………………………………………………………………………………178

Liquidity Premium and Preferred Habitat Theories …………………………………………………….179

Evidence on the Term Structure ……………………………………………………………………………..182

FYI The Yield Curve as a Forecasting Tool for Inflation and the Business Cycle 183

Summary …………………………………………………………………………………………………………….183

APPLICATION Interpreting Yield Curves, 1980–2020 ………………………………………183

Summary 185 • Key Terms 185 • Questions 185 • Applied Problems 187 •

Data Analysis Problems 187

CHAPTER 7

The Stock Market, the Theory of Rational Expectations,

and the Efficient Market Hypothesis 189

7.1 Computing the Price of Common Stock ……………………………………………………………….189

The One-Period Valuation Model ……………………………………………………………………………190

The Generalized Dividend Valuation Model ………………………………………………………………191

The Gordon Growth Model ……………………………………………………………………………………191

7.2 How the Market Sets Stock Prices ………………………………………………………………………….192

APPLICATION Monetary Policy and Stock Prices …………………………………………….194

APPLICATION The Coronavirus Stock Market Crash of 2020 ……………………………194

7.3 The Theory of Rational Expectations ……………………………………………………………………..194

Formal Statement of the Theory ……………………………………………………………………………..196

Rationale Behind the Theory ………………………………………………………………………………….196

Implications of the Theory …………………………………………………………………………………….197

7.4 The Efficient Market Hypothesis: Rational Expectations in Financial Markets …198

Rationale Behind the Hypothesis …………………………………………………………………………….199

Random-Walk Behavior of Stock Prices ……………………………………………………………………200

Global Should Foreign Exchange Rates Follow a Random Walk? 201

APPLICATION Practical Guide to Investing in the Stock Market ………………………..201

How Valuable Are Reports Published by Investment Advisers? …………………………………….201

Should You Be Skeptical of Hot Tips? ………………………………………………………………………202

FYI Should You Hire an Ape as Your Investment Adviser? 203

Do Stock Prices Always Rise When There Is Good News? ……………………………………………203

Efficient Market Prescription for the Investor …………………………………………………………….203

7.5 Why the Efficient Market Hypothesis Does Not Imply That

Financial Markets Are Efficient ………………………………………………………………………………..204

APPLICATION What Do Stock Market Crashes Tell Us

About the Efficient Market Hypothesis and the Efficiency

of Financial Markets? ……………………………………………………………………………205

7.6 Behavioral Finance …………………………………………………………………………………………………..205

Summary 206 • Key Terms 207 • Questions 207 • Applied Problems 208 •

Data Analysis Problems 209

PART 3 Financial Institutions 211

CHAPTER 8

An Economic Analysis of Financial Structure 212

8.1 Basic Facts About Financial Structure Throughout The World …………………………..212

8.2 Transaction Costs ………………………………………………………………………………………………………215

How Transaction Costs Influence Financial Structure …………………………………………………215

How Financial Intermediaries Reduce Transaction Costs …………………………………………….216

8.3 Asymmetric Information: Adverse Selection and Moral Hazard ……………………….217

8.4 The Lemons Problem: How Adverse Selection Influences Financial Structure .217

Lemons in the Stock and Bond Markets ……………………………………………………………………218

Tools to Help Solve Adverse Selection Problems ………………………………………………………..219

FYI The Enron Implosion 220

8.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts …..223

Moral Hazard in Equity Contracts: The Principal–Agent Problem …………………………………223

Tools to Help Solve the Principal–Agent Problem ………………………………………………………224

8.6 How Moral Hazard Influences Financial Structure in Debt Markets …………………226

Tools to Help Solve Moral Hazard in Debt Contracts ………………………………………………….226

Summary …………………………………………………………………………………………………………….228

APPLICATION Financial Development and Economic Growth ………………………….229

FYI The Tyranny of Collateral 230

APPLICATION Is China a Counterexample to the Importance of Financial

Development? ………………………………………………………………………………………231

Summary 232 • Key Terms 233 • Questions 233 • Applied Problems 234 •

Data Analysis Problems 235

CHAPTER 9

Banking and the Management of Financial Institutions 236

9.1 The Bank Balance Sheet …………………………………………………………………………………………..236

Liabilities …………………………………………………………………………………………………………….236

Assets …………………………………………………………………………………………………………………239

9.2 Basic Banking …………………………………………………………………………………………………………….240

9.3 General Principles of Bank Management ……………………………………………………………..243

Liquidity Management and the Role of Reserves ………………………………………………………..243

Asset Management ………………………………………………………………………………………………..246

Liability Management ……………………………………………………………………………………………247

Capital Adequacy Management ………………………………………………………………………………248

APPLICATION Strategies for Managing Bank Capital ……………………………………….250

APPLICATION How a Capital Crunch Caused a Credit Crunch During the

Global Financial Crisis ………………………………………………………………………….251

9.4 Managing Credit Risk ……………………………………………………………………………………………….251

Screening and Monitoring ……………………………………………………………………………………..252

Long-Term Customer Relationships …………………………………………………………………………253

Loan Commitments ………………………………………………………………………………………………254

Collateral and Compensating Balances …………………………………………………………………….254

Credit Rationing …………………………………………………………………………………………………..254

9.5 Managing Interest-Rate Risk …………………………………………………………………………………..255

Gap and Duration Analysis …………………………………………………………………………………….256

APPLICATION Strategies for Managing Interest-Rate Risk …………………………………257

9.6 Off-Balance-Sheet Activities ……………………………………………………………………………………257

Loan Sales …………………………………………………………………………………………………………..258

Generation of Fee Income ……………………………………………………………………………………..258

Trading Activities and Risk Management Techniques ………………………………………………….258

Global Barings, Daiwa, Sumitomo, Société Générale, and JP Morgan Chase:

Rogue Traders and the Principal–Agent Problem 259

Summary 260 • Key Terms 261 • Questions 261 • Applied Problems 262 •

Data Analysis Problem 263

CHAPTER 9 APPENDIX 1

Duration Gap Analysis

Go to MyLab Economics

CHAPTER 9 APPENDIX 2

Measuring Bank Performance

Go to MyLab Economics

CHAPTER 10

Economic Analysis of Financial Regulation 264

10.1 Asymmetric Information as a Rationale for Financial Regulation …………………..264

Government Safety Net …………………………………………………………………………………………264

Global The Spread of Government Deposit Insurance Throughout the World:

Is This a Good Thing? 266

Drawbacks of the Government Safety Net ………………………………………………………………..267

10.2 Types of Financial Regulation ……………………………………………………………………………….269

Restrictions on Asset Holdings ……………………………………………………………………………….269

Capital Requirements ……………………………………………………………………………………………270

Global Where Is the Basel Accord Heading After the Global Financial Crisis? 271

Prompt Corrective Action ………………………………………………………………………………………272

Financial Supervision: Chartering and Examination …………………………………………………..272

Assessment of Risk Management …………………………………………………………………………….273

Disclosure Requirements ……………………………………………………………………………………….274

Consumer Protection …………………………………………………………………………………………….275

Restrictions on Competition …………………………………………………………………………………..275

Summary …………………………………………………………………………………………………………….276

Global International Financial Regulation 277

Summary 279 • Key Terms 280 • Questions 280 • Applied Problems 281 •

Data Analysis Problems 281

CHAPTER 10 APPENDIX

Banking Crises Throughout the World

Go to MyLab Economics

CHAPTER 11

Banking Industry: Structure and Competition 283

11.1 Historical Development of the Banking System ………………………………………………..283

Multiple Regulatory Agencies …………………………………………………………………………………285

11.2 Financial Innovation and the Growth of the “Shadow Banking System” ………..286

Responses to Changes in Demand Conditions: Interest-Rate Volatility …………………………..287

Responses to Changes in Supply Conditions: Information Technology ………………………….288

Securitization and the Shadow Banking System …………………………………………………………290

Avoidance of Existing Regulations …………………………………………………………………………..292

FYI Bruce Bent and the Money Market Mutual Fund Panic of 2008 294

Financial Innovation and the Decline of Traditional Banking ……………………………………….294

11.3 Structure of the U.S. Commercial Banking Industry ………………………………………….297

Restrictions on Branching ………………………………………………………………………………………299

Response to Branching Restrictions …………………………………………………………………………299

11.4 Bank Consolidation and Nationwide Banking …………………………………………………..300

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ……………………..302

What Will the Structure of the U.S. Banking Industry Look Like in the Future? ……………..302

Global Comparison of Banking Structure in the United States and Abroad 303

Are Bank Consolidation and Nationwide Banking Good Things? ………………………………….303

11.5 Separation of Banking and Other Financial Service Industries ………………………..304

Erosion of Glass-Steagall ………………………………………………………………………………………..304

The Gramm-Leach-Bliley Financial Services Modernization Act of 1999: Repeal of

Glass-Steagall ………………………………………………………………………………………………….305

Implications for Financial Consolidation ………………………………………………………………….305

Separation of Banking and Other Financial Services Industries Throughout the World ……305

FYI The Global Financial Crisis and the Demise of Large, Free-Standing

Investment Banks 306

11.6 Thrift Industry: Regulation and Structure ……………………………………………………………306

Savings and Loan Associations ………………………………………………………………………………..307

Mutual Savings Banks ……………………………………………………………………………………………307

Credit Unions ………………………………………………………………………………………………………307

11.7 International Banking …………………………………………………………………………………………….308

Eurodollar Market ………………………………………………………………………………………………..308

Global Ironic Birth of the Eurodollar Market 309

Structure of U.S. Banking Overseas ………………………………………………………………………….309

Foreign Banks in the United States ………………………………………………………………………….310

Summary 311 • Key Terms 312 • Questions 312 • Data Analysis Problems 313

CHAPTER 12

Financial Crises in Advanced Economies 315

Global The European Sovereign Debt Crisis 316

12.1 What is a Financial Crisis? ……………………………………………………………………………………..316

12.2 Dynamics of Financial Crises ………………………………………………………………………………..317

Stage One: Initial Phase …………………………………………………………………………………………317

Stage Two: Banking Crisis ………………………………………………………………………………………319

Stage Three: Debt Deflation ……………………………………………………………………………………321

APPLICATION The Mother of All Financial Crises: The Great Depression ………….321

The U.S. Stock Market Crash ………………………………………………………………………………….321

Worldwide Decline in Asset Prices …………………………………………………………………………..321

Bank Failures ……………………………………………………………………………………………………….323

Economic Contraction and Debt Deflation ……………………………………………………………….323

12.3 The Global Financial Crisis of 2007–2009 …………………………………………………………..323

Causes of the 2007–2009 Financial Crisis ………………………………………………………………..324

FYI Collateralized Debt Obligations (CDOs) and Credit Default Swaps 325

Effects of the 2007–2009 Financial Crisis …………………………………………………………………326

Inside the Fed Was the Fed to Blame for the Housing Price Bubble? 327

Height of the 2007–2009 Financial Crisis ………………………………………………………………..330

APPLICATION Could the Coronavirus Pandemic Have Led to a Financial Crisis?……..332

12.4 Government Intervention and the Recovery ……………………………………………………..333

Short-Term Responses and Recovery ……………………………………………………………………….333

Global Latvia’s Different and Controversial Response: Expansionary Contraction 334

12.5 Stabilizing the Global Financial System: Long-Term Responses ………………………334

Global Financial Regulatory Framework …………………………………………………………………..334

Policy Areas at the National Level ……………………………………………………………………………335

FYI The LIBOR Scandal 337

12.6 Future Regulations and Policy Areas at the International Level ………………………337

Bilateral and Multilateral Supervisory Cooperation …………………………………………………….338

Collective Supervisory Cooperation …………………………………………………………………………338

Collectively Coordinated Macroeconomic Stability Plans …………………………………………….338

Self-Discipline ……………………………………………………………………………………………………..338

Summary 339 • Key Terms 340 • Questions 340 • Data Analysis Problems 341

CHAPTER 13

Financial Crises in Emerging Market Economies 342

13.1 Dynamics of Financial Crises in Emerging Market Economies ……………………… 342

Stage One: Initial Phase………………………………………………………………………………………… 343

Stage Two: Currency Crises…………………………………………………………………………………… 346

Stage Three: Full-Fledged Financial Crisis……………………………………………………………….. 347

APPLICATION Crisis in South Korea, 1997–1998…………………………………………… 348

Financial Liberalization and Globalization Mismanaged…………………………………………….. 349

Perversion of the Financial Liberalization and Globalization Process: Chaebols and the

South Korean Crisis…………………………………………………………………………………………. 350

Stock Market Decline and Failure of Firms Increase Uncertainty…………………………………. 352

Adverse Selection and Moral Hazard Problems Worsen and the Economy Contracts………. 353

Currency Crisis Ensues………………………………………………………………………………………… 353

Final Stage: Currency Crisis Triggers Full-Fledged Financial Crisis……………………………… 353

Recovery Commences………………………………………………………………………………………….. 355

Global China and the “Noncrisis” in 1997–1998 355

APPLICATION The Argentine Financial Crisis, 2001–2002……………………………… 356

Severe Fiscal Imbalances………………………………………………………………………………………. 356

Adverse Selection and Moral Hazard Problems Worsen……………………………………………… 356

Bank Panic Begins……………………………………………………………………………………………….. 357

Currency Crisis Ensues………………………………………………………………………………………… 357

Currency Crisis Triggers Full-Fledged Financial Crisis………………………………………………. 357

Recovery Begins………………………………………………………………………………………………….. 359

Global When an Advanced Economy Is Like an Emerging Market Economy:

The Icelandic Financial Crisis of 2008 360

13.2 Preventing Emerging Market Financial Crises…………………………………………………… 361

Beef Up Prudential Regulation and Supervision of Banks…………………………………………… 361

Encourage Disclosure and Market-Based Discipline…………………………………………………… 362

Limit Currency Mismatch……………………………………………………………………………………… 362

Sequence Financial Liberalization…………………………………………………………………………… 362

Summary 363 • Key Terms 363 • Questions 363 • Data Analysis Problems 364

PART 4 Central Banking and the Conduct of Monetary Policy 365

CHAPTER 14

Central Banks 366

14.1 Origins of the Central Banking System ………………………………………………………………..366

Global Who Should Own Central Banks? 367

14.2 Variations in the Functions and Structures of Central Banks ……………………………368

The European Central Bank, the Euro System, and the European System

of Central Banks ………………………………………………………………………………………………368

Decision-making Bodies of the ECB ………………………………………………………………………..369

How Monetary Policy Is Conducted within the ECB …………………………………………………..372

Global The Importance of the Bundesbank within the ECB 372

Global Are Non-Euro Central Banks Constrained by Membership of the EU? 374

The Federal Reserve System ……………………………………………………………………………………374

Difference between the ECB and the Fed ………………………………………………………………….375

The Bank of England …………………………………………………………………………………………….376

Global Brexit and the BoE 376

14.3 Structure of Central Banks of Larger Economies ……………………………………………….377

The Bank of Canada ……………………………………………………………………………………………..377

The Bank of Japan ………………………………………………………………………………………………..378

The People’s Bank of China …………………………………………………………………………………….379

14.4 Structure and Independence of Central Banks of Emerging

Market Economies …………………………………………………………………………………………………380

14.5 Central Banks Independence ……………………………………………………………………………….380

The Case for Independence ……………………………………………………………………………………381

The Case against Independence ………………………………………………………………………………381

The Trend toward Greater Independence ………………………………………………………………….381

Summary 382 • Key Terms 383 • Questions 383 • Data Analysis Problems 383

CHAPTER 15

The Money Supply Process 384

15.1 Three Players in the Money Supply Process ……………………………………………………….384

15.2 The Fed’s Balance Sheet ………………………………………………………………………………………..385

Liabilities …………………………………………………………………………………………………………….385

Assets …………………………………………………………………………………………………………………386

15.3 Control of the Monetary Base ………………………………………………………………………………387

Federal Reserve Open Market Operations …………………………………………………………………387

Shifts from Deposits into Currency ………………………………………………………………………….388

Loans to Financial Institutions ………………………………………………………………………………..389

Other Factors That Affect the Monetary Base …………………………………………………………….390

Overview of the Fed’s Ability to Control the Monetary Base …………………………………………390

15.4 Multiple Deposit Creation: A Simple Model ………………………………………………………391

Deposit Creation: The Single Bank ………………………………………………………………………….391

Deposit Creation: The Banking System …………………………………………………………………….392

Deriving the Formula for Multiple Deposit Creation ………………………………………………….395

Critique of the Simple Model …………………………………………………………………………………396

15.5 Factors that Determine the Money Supply ………………………………………………………..397

Changes in the Nonborrowed Monetary Base, MBn …………………………………………………….397

Changes in Borrowed Reserves, BR, from the Fed ………………………………………………………397

Changes in the Required Reserve Ratio, rr ………………………………………………………………..397

Changes in Excess Reserves ……………………………………………………………………………………398

Changes in Currency Holdings ……………………………………………………………………………….398

15.6 Overview of the Money Supply Process ……………………………………………………………..398

15.7 The Money Multiplier ……………………………………………………………………………………………399

Deriving the Money Multiplier ……………………………………………………………………………….399

Intuition Behind the Money Multiplier …………………………………………………………………….401

Money Supply Response to Changes in the Factors …………………………………………………….402

APPLICATION Quantitative Easing and the Money Supply During the

Global Financial and the Coronavirus Crises……………………………………………403

Summary 405 • Key Terms 406 • Questions 406 • Applied Problems 407 •

Data Analysis Problems 408

CHAPTER 15 APPENDIX 1

The Fed’s Balance Sheet and the Monetary Base

Go to MyLab Economics

CHAPTER 15 APPENDIX 2

The M2 Money Multiplier

Go to MyLab Economics

CHAPTER 15 APPENDIX 3

Explaining the Behavior of the Currency Ratio

Go to MyLab Economics

CHAPTER 15 APPENDIX 4

The Great Depression Bank Panics, 1930–1933, and the Money Supply

Go to MyLab Economics

CHAPTER 16

Tools of Monetary Policy 409

16.1 The Market for Reserves and the Federal Funds Rate ……………………………………….409

Demand and Supply in the Market for Reserves ………………………………………………………..410

How Changes in the Tools of Monetary Policy Affect the Federal Funds Rate …………………411

APPLICATION How the Federal Reserve’s Operating Procedures Limit

Fluctuations in the Federal Funds Rate …………………………………………………..415

16.2 Conventional Monetary Policy Tools …………………………………………………………………..416

Open Market Operations ……………………………………………………………………………………….417

Inside the Fed A Day at the Trading Desk 418

Discount Policy and the Lender of Last Resort …………………………………………………………..419

Inside the Fed Using Discount Policy to Prevent a Financial Panic 421

Reserve Requirements ……………………………………………………………………………………………422

Interest on Excess Reserves …………………………………………………………………………………….422

16.3 Nonconventional Monetary Policy Tools and Quantitative Easing in the

Wake of the Global Financial Crisis and the Coronavirus Pandemic ………………..423

Liquidity Provision ……………………………………………………………………………………………….423

Large-Scale Asset Purchases ……………………………………………………………………………………424

Inside the Fed Fed Lending Facilities During the Global Financial and

Coronavirus Crises 425

Quantitative Easing Versus Credit Easing ………………………………………………………………….426

Forward Guidance ………………………………………………………………………………………………..428

Negative Interest Rates on Banks’ Deposits ……………………………………………………………….429

16.4 Monetary Policy Tools of the European Central Bank ………………………………………430

Open Market Operations ……………………………………………………………………………………….430

Lending to Banks ………………………………………………………………………………………………….431

Interest on Excess Reserves …………………………………………………………………………………….431

Reserve Requirements ……………………………………………………………………………………………431

Summary 431 • Key Terms 432 • Questions 432 • Applied Problems 433 •

Data Analysis Problems 434

CHAPTER 17

The Conduct of Monetary Policy: Strategy and Tactics 435

17.1 The Price Stability Goal and the Nominal Anchor …………………………………………….435

The Role of a Nominal Anchor ……………………………………………………………………………….436

The Time-Inconsistency Problem ……………………………………………………………………………436

17.2 Other Goals of Monetary Policy …………………………………………………………………………..437

High Employment and Output Stability …………………………………………………………………..437

Economic Growth ………………………………………………………………………………………………..438

Stability of Financial Markets …………………………………………………………………………………438

Interest-Rate Stability …………………………………………………………………………………………….438

Stability in Foreign Exchange Markets ……………………………………………………………………..439

17.3 Should Price Stability be the Primary Goal of Monetary Policy? …………………….439

Hierarchical Versus Dual Mandates ………………………………………………………………………….439

Price Stability as the Primary, Long-Run Goal of Monetary Policy …………………………………440

17.4 Inflation Targeting ………………………………………………………………………………………………….440

Inflation Targeting in New Zealand, Canada, and the United Kingdom …………………………441

Advantages of Inflation Targeting ……………………………………………………………………………443

Disadvantages of Inflation Targeting ………………………………………………………………………..445

17.5 The Evolution of the Federal Reserve’s Monetary Policy Strategy …………………..446

The Fed’s “Just Do It” Monetary Policy Strategy …………………………………………………………446

The Long Road to Inflation Targeting ………………………………………………………………………448

Inside the Fed Ben Bernanke’s Advocacy of Inflation Targeting 449

Global The European Central Bank’s Monetary Policy Strategy 449

17.6 Lessons for Monetary Policy Strategy from the Global Financial Crisis ………….450

Implications for Inflation Targeting …………………………………………………………………………451

Inside the Fed The Fed’s New Monetary Policy Strategy: Average Inflation

Targeting 452

17.7 Should Central Banks Try to Stop Asset-Price Bubbles? ……………………………………453

Two Types of Asset-Price Bubbles …………………………………………………………………………….453

The Debate over Whether Central Banks Should Try to Pop Bubbles …………………………….454

17.8 Tactics: Choosing the Policy Instrument ……………………………………………………………..457

Criteria for Choosing the Policy Instrument ……………………………………………………………..459

17.9 Tactics: The Taylor Rule ………………………………………………………………………………………….460

Inside the Fed The Fed’s Use of the Taylor Rule 462

Summary 463 • Key Terms 464 • Questions 464 • Applied Problems 465 •

Data Analysis Problems 465

CHAPTER 17 APPENDIX 1

Monetary Targeting

Go to MyLab Economics

CHAPTER 17 APPENDIX 2

A Brief History of Federal Reserve Policymaking

Go to MyLab Economics

PART 5 International Finance and Monetary Policy 467

CHAPTER 18

The Foreign Exchange Market 468

18.1 Foreign Exchange Market ……………………………………………………………………………………..468

Following the Financial News Foreign Exchange Rates 469

What Are Foreign Exchange Rates? ………………………………………………………………………….469

Why Are Exchange Rates Important? ……………………………………………………………………….469

How Is Foreign Exchange Traded? …………………………………………………………………………..470

18.2 Exchange Rates in the Long Run ………………………………………………………………………….471

Theory of Purchasing Power Parity ………………………………………………………………………….471

APPLICATION Burgernomics: Big Macs and PPP …………………………………………….473

Factors That Affect Exchange Rates in the Long Run …………………………………………………..475

18.3 Exchange Rates in the Short Run: A Supply and Demand Analysis ………………..477

Supply Curve for Domestic Assets …………………………………………………………………………..477

Demand Curve for Domestic Assets …………………………………………………………………………478

Equilibrium in the Foreign Exchange Market ……………………………………………………………479

18.4 Explaining Changes in Exchange Rates ……………………………………………………………….479

Shifts in the Demand for Domestic Assets ………………………………………………………………..479

Recap: Factors That Change the Exchange Rate …………………………………………………………482

APPLICATION Effects of Changes in Interest Rates on the Equilibrium

Exchange Rate ……………………………………………………………………………………..484

APPLICATION The Global Financial Crisis and the Dollar ……………………………….486

APPLICATION Brexit and the British Pound ……………………………………………………487

Summary 488 • Key Terms 489 • Questions 489 • Applied Problems 490 •

Data Analysis Problems 490

APPENDIX TO CHAPTER 18

The Interest Parity Condition

Go to MyLab Economics

CHAPTER 19

The International Financial System 491

19.1 Intervention in the Foreign Exchange Market ……………………………………………………491

Foreign Exchange Intervention and the Money Supply ……………………………………………….491

Global Variation in Central Banks’ Activism and Method of Intervention on

Foreign Exchange Markets 492

Unsterilized Intervention ……………………………………………………………………………………….494

Sterilized Intervention …………………………………………………………………………………………..495

19.2 Balance of Payments ……………………………………………………………………………………………..495

Current Account ………………………………………………………………………………………………….496

Financial Account ………………………………………………………………………………………………..496

Global Should We Worry About the Large and Recurrent Trade Deficit? 497

19.3 Exchange Rate Regimes in the International Financial System ……………………….498

Gold Standard ……………………………………………………………………………………………………..498

The Bretton Woods System …………………………………………………………………………………….498

How a Fixed Exchange Rate Regime Works ………………………………………………………………499

Speculative Attacks ……………………………………………………………………………………………….501

APPLICATION The Foreign Exchange Crisis of September 1992 ……………………….501

The Policy Trilemma ……………………………………………………………………………………………..503

APPLICATION How Did China Accumulate $4 Trillion of International Reserves? ……..504

Monetary Unions ………………………………………………………………………………………………….504

Managed Float ……………………………………………………………………………………………………..505

Global Will the Euro Survive? 505

19.4 Capital Controls ……………………………………………………………………………………………………..506

Controls on Capital Outflows …………………………………………………………………………………506

Controls on Capital Inflows …………………………………………………………………………………..506

19.5 The Role of the IMF ……………………………………………………………………………………………….507

Should the IMF Act as an International Lender of Last Resort? …………………………………….507

19.6 International Considerations and Monetary Policy …………………………………………..508

Direct Effects of the Foreign Exchange Market on Monetary Policy ……………………………….508

Exchange Rate Considerations ………………………………………………………………………………..509

19.7 To PEG or Not to Peg: Exchange-Rate Targeting as an Alternative

Monetary Policy Strategy …………………………………………………………………………………………509

Advantages of Exchange-Rate Targeting ……………………………………………………………………509

Disadvantages of Exchange-Rate Targeting ………………………………………………………………..510

When Is Exchange-Rate Targeting Desirable for Industrialized Countries? ……………………..512

When Is Exchange-Rate Targeting Desirable for Emerging Market Countries? ………………..513

Currency Boards …………………………………………………………………………………………………..513

Global Argentina’s Currency Board 514

Dollarization ……………………………………………………………………………………………………….514

Summary 515 • Key Terms 516 • Questions 516 • Applied Problems 517 •

Data Analysis Problems 518

PART 6 Monetary Theory 519

CHAPTER 20

Quantity Theory, Inflation, and the Demand for Money 520

20.1 Quantity Theory of Money …………………………………………………………………………………..520

Velocity of Money and Equation of Exchange ……………………………………………………………520

From the Equation of Exchange to the Quantity Theory of Money ……………………………….522

Quantity Theory and the Price Level ……………………………………………………………………….522

Quantity Theory and Inflation ……………………………………………………………………………….523

APPLICATION Testing the Quantity Theory of Money ……………………………………..524

20.2 Budget Deficits and Inflation ………………………………………………………………………………..526

Government Budget Constraint ………………………………………………………………………………526

FYI Modern Monetary Theory 528

Hyperinflation ……………………………………………………………………………………………………..528

APPLICATION The Zimbabwean Hyperinflation ……………………………………………..529

20.3 Keynesian Theories of Money Demand ……………………………………………………………..529

Transactions Motive ………………………………………………………………………………………………530

Precautionary Motive …………………………………………………………………………………………….530

Speculative Motive ……………………………………………………………………………………………….530

Putting the Three Motives Together …………………………………………………………………………530

20.4 Portfolio Theories of Money Demand ………………………………………………………………..531

Theory of Portfolio Choice and Keynesian Liquidity Preference ……………………………………531

Other Factors That Affect the Demand for Money ………………………………………………………532

Summary …………………………………………………………………………………………………………….532

20.5 Empirical Evidence on the Demand for Money ………………………………………………..533

Interest Rates and Money Demand ………………………………………………………………………….533

Stability of Money Demand ……………………………………………………………………………………534

Summary 534 • Key Terms 535 • Questions 535 • Applied Problems 536 •

Data Analysis Problems 537

CHAPTER 21

The IS Curve 538

21.1 Planned Expenditure and Aggregate Demand …………………………………………………..538

21.2 The Components of Aggregate Demand ……………………………………………………………539

Consumption Expenditure …………………………………………………………………………………….539

FYI Meaning of the Word Investment 540

Planned Investment Spending ………………………………………………………………………………..540

Government Purchases and Taxes ……………………………………………………………………………542

Net Exports …………………………………………………………………………………………………………543

21.3 Goods Market Equilibrium ……………………………………………………………………………………544

Solving for Goods Market Equilibrium …………………………………………………………………….544

Deriving the IS Curve ……………………………………………………………………………………………545

21.4 Understanding the IS Curve ………………………………………………………………………………….545

What the IS Curve Tells Us: Intuition ………………………………………………………………………545

What the IS Curve Tells Us: Numerical Example ……………………………………………………….545

Why the Economy Heads Toward Equilibrium ………………………………………………………….547

21.5 Factors that Shift the IS Curve ………………………………………………………………………………547

Changes in Government Purchases ………………………………………………………………………….547

APPLICATION The Vietnam War Buildup, 1964–1969 ……………………………………..548

Changes in Taxes ………………………………………………………………………………………………….549

APPLICATION The Fiscal Stimulus Package of 2009 ………………………………………..550

Changes in Autonomous Spending ………………………………………………………………………….551

Changes in Financial Frictions ……………………………………………………………………………….553

Summary of Factors That Shift the IS Curve ……………………………………………………………..553

Summary 553 • Key Terms 553 • Questions 554 • Applied Problems 555 •

Data Analysis Problems 556

CHAPTER 22

The Monetary Policy and Aggregate Demand Curves 557

22.1 The Federal Reserve and Monetary Policy …………………………………………………………557

22.2 The Monetary Policy Curve ………………………………………………………………………………….558

Why the Monetary Policy Curve Has an Upward Slope……………………………………………….558

Shifts in the MP Curve …………………………………………………………………………………………..559

Movements Along Versus Shifts in the MP Curve ……………………………………………………….560

APPLICATION Movements Along the MP Curve: The Rise in the Federal

Funds Rate Target, 2004–2006 and 2015–2019 ………………………………………..561

APPLICATION Shift in the MP Curve: Autonomous Monetary Easing During

the Global Financial and Coronavirus Crises …………………………………………..561

22.3 The Aggregate Demand Curve ……………………………………………………………………………..562

Deriving the Aggregate Demand Curve Graphically ……………………………………………………563

FYI Deriving the Aggregate Demand Curve Algebraically 563

Factors That Shift the Aggregate Demand Curve ………………………………………………………..565

Summary 568 • Key Terms 568 • Questions 568 • Applied Problems 570 •

Data Analysis Problems 571

CHAPTER 23

Aggregate Demand and Supply Analysis 572

23.1 Business Cycles and Inflation ……………………………………………………………………………….572

Business Cycles ……………………………………………………………………………………………………572

Inflation ……………………………………………………………………………………………………………..575

23.2 Aggregate Demand ………………………………………………………………………………………………..576

Components of Aggregate Demand …………………………………………………………………………576

Following the Financial News Aggregate Output, Unemployment, and Inflation 576

Deriving the Aggregate Demand Curve …………………………………………………………………….577

Factors That Shift the Aggregate Demand Curve ………………………………………………………..577

FYI What Does Autonomous Mean? 578

23.3 Aggregate Supply ……………………………………………………………………………………………………581

Long-Run Aggregate Supply Curve ………………………………………………………………………….581

Short-Run Aggregate Supply Curve …………………………………………………………………………582

Price Stickiness and the Short-Run Aggregate Supply Curve ………………………………………..584

23.4 Shifts in the Aggregate Supply Curves …………………………………………………………………584

Shifts in the Long-Run Aggregate Supply Curve ………………………………………………………..584

Shifts in the Short-Run Aggregate Supply Curve ………………………………………………………..585

23.5 Equilibrium in Aggregate Demand and Supply Analysis ………………………………….588

Short-Run Equilibrium ………………………………………………………………………………………….589

Aggregate Demand and Supply Analysis Using an Aggregate Output Index ……………………589

How the Short-Run Equilibrium Moves to the Long-Run Equilibrium over Time ……………590

Self-Correcting Mechanism …………………………………………………………………………………….593

23.6 Changes in Equilibrium: Aggregate Demand Shocks ………………………………………..593

APPLICATION The Volcker Disinflation, 1980–1986 ……………………………………….595

23.7 Changes in Equilibrium: Aggregate Supply (Inflation) Shocks …………………………596

APPLICATION Negative Supply Shocks, 1973–1975 and 1978–1980 …………………598

23.8 Conclusions from Aggregate Demand and Supply Analysis ……………………………599

APPLICATION AD/AS Analysis of the Great Recession of 2007–2009 …………………600

APPLICATION An AD/AS Analysis of the Covid-19 Recession …………………………..601

Summary 604 • Key Terms 604 • Questions 605 • Applied Problems 605 •

Data Analysis Problems 606

APPENDIX TO CHAPTER 23

The Phillips Curve and the Short-Run Aggregate Supply Curve 607

23.A1 The Phillips Curve…………………………………………………………………………………………………607

Phillips Curve Analysis in the 1960s………………………………………………………………………..607

The Friedman-Phelps Phillips Curve Analysis……………………………………………………………608

FYI The Phillips Curve Trade-Off and Macroeconomic Policy in the 1960s 609

The Phillips Curve After the 1960s…………………………………………………………………………..611

The Modern Phillips Curve…………………………………………………………………………………….611

The Modern Phillips Curve with Adaptive (Backward-Looking) Expectations…………………612

23.A2 The Short-Run Aggregate Supply Curve……………………………………………………………613

CHAPTER 23 APPENDIX 1

The Effects of Macroeconomic Shocks on Asset Prices

Go to MyLab Economics

CHAPTER 23 APPENDIX 2

Aggregate Demand and Supply: A Numerical Example

Go to MyLab Economics

CHAPTER 24

Monetary Policy Theory 615

24.1 Response of Monetary Policy to Shocks …………………………………………………………….615

Response to an Aggregate Demand Shock …………………………………………………………………616

Response to a Supply Shock …………………………………………………………………………………..617

The Bottom Line: The Relationship Between Stabilizing Inflation and

Stabilizing Economic Activity …………………………………………………………………………….620

24.2 How Actively Should Policymakers Try to Stabilize Economic Activity? ………..621

Lags and Policy Implementation ……………………………………………………………………………..622

FYI The Activist/Nonactivist Debate over the Obama Fiscal Stimulus Package 623

24.3 Inflation: Always and Everywhere a Monetary Phenomenon ………………………….623

24.4 Causes of Inflationary Monetary Policy ………………………………………………………………624

High Employment Targets and Inflation …………………………………………………………………..625

APPLICATION The Great Inflation ………………………………………………………………..628

24.5 Monetary Policy at the Effective Lower Bound ………………………………………………….630

Deriving the Aggregate Demand Curve with the Effective Lower Bound ………………………..630

The Disappearance of the Self-Correcting Mechanism at the Effective Lower Bound ………..632

APPLICATION Nonconventional Monetary Policy and Quantitative Easing ………..633

Liquidity Provision ……………………………………………………………………………………………….634

Asset Purchases and Quantitative Easing ………………………………………………………………….635

Management of Expectations ………………………………………………………………………………….636

APPLICATION Abenomics and the Shift in Japanese Monetary Policy in 2013 …….636

Summary 639 • Key Terms 639 • Questions 639 • Applied Problems 640 •

Data Analysis Problems 641

CHAPTER 25

The Role of Expectations in Monetary Policy 642

25.1 Lucas Critique of Policy Evaluation ……………………………………………………………………..642

Econometric Policy Evaluation ……………………………………………………………………………….643

APPLICATION The Term Structure of Interest Rates ………………………………………..643

25.2 Policy Conduct: Rules or Discretion? …………………………………………………………………..644

Discretion and the Time-Inconsistency Problem ………………………………………………………..644

Types of Rules ………………………………………………………………………………………………………645

The Case for Rules ………………………………………………………………………………………………..645

FYI The Political Business Cycle and Richard Nixon 646

The Case for Discretion …………………………………………………………………………………………646

Constrained Discretion ………………………………………………………………………………………….647

Global The Demise of Monetary Targeting in Switzerland 647

25.3 The Role of Credibility and a Nominal Anchor ………………………………………………….648

Benefits of a Credible Nominal Anchor …………………………………………………………………….648

Credibility and Aggregate Demand Shocks ……………………………………………………………….649

Credibility and Aggregate Supply Shocks …………………………………………………………………651

APPLICATION A Tale of Three Oil Price Shocks ……………………………………………..652

Credibility and Anti-Inflation Policy ………………………………………………………………………..654

Global Ending the Bolivian Hyperinflation: A Successful Anti-Inflation Program 655

25.4 Approaches to Establishing Central Bank Credibility ………………………………………..656

Nominal GDP Targeting ………………………………………………………………………………………..656

Appoint “Conservative” Central Bankers …………………………………………………………………..657

Inside the Fed The Appointment of Paul Volcker, Anti-Inflation Hawk 657

Summary 658 • Key Terms 658 • Questions 659 • Applied Problems 660 • Data Analysis Problems 660

CHAPTER 26

Transmission Mechanisms of Monetary Policy 661

26.1 Transmission Mechanisms of Monetary Policy ………………………………………………….662

Traditional Interest-Rate Channels …………………………………………………………………………..662

Other Asset Price Channels ……………………………………………………………………………………663

Credit View …………………………………………………………………………………………………………666

FYI Consumers’ Balance Sheets and the Great Depression 669

Why Are Credit Channels Likely to Be Important? …………………………………………………….670

APPLICATION The Great Recession ……………………………………………………………….670

26.2 Lessons for Monetary Policy …………………………………………………………………………………671

APPLICATION Applying the Monetary Policy Lessons to Japan’s Two Lost Decades …….672

Summary 673 • Key Terms 673 • Questions 674 • Applied Problems 675 • Data Analysis Problems 675

Chapter 26 APPENDIX

Evaluating Empirical Evidence: The Debate Over the Importance of Money in

Economic Fluctuations

Go to MyLab Economics

Glossary ………………………………………………………………………………………………………………………677

Index …………………………………………………………………………………………………………………………..689

This book is US$10
To get free sample pages OR Buy this book


Share this Book!

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.