The economics of money, banking and financial markets / Frederic S. Mishkin.
2013
HG173 .M632 2013 (Map It)
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Author
Title
The economics of money, banking and financial markets / Frederic S. Mishkin.
Published
Boston : Pearson, [2013]
Copyright
©2013
Call Number
HG173 .M632 2013
Edition
Tenth edition.
ISBN
9780132770248
0132770245
0132770245
Description
xli, 622 pages, 47 unnumbered pages : color illustrations ; 26 cm.
System Control No.
(OCoLC)759772108
Bibliography, etc. Note
Includes bibliographical references and index.
Series
Record Appears in
Table of Contents
pt. 1
INTRODUCTION
1
ch. 1
Why Study Money, Banking, and Financial Markets?
2
Why Study Financial Markets?
2
The Bond Market and Interest Rates
2
The Stock Market
4
Why Study Financial Institutions and Banking?
4
Structure of the Financial System
5
Financial Crises
6
Banks and Other Financial Institutions
6
Financial Innovation
6
Why Study Money and Monetary Policy?
7
Money and Business Cycles
7
Money and Inflation
7
Money and Interest Rates
10
Conduct of Monetary Policy
10
Fiscal Policy and Monetary Policy
11
Why Study International Finance?
12
The Foreign Exchange Market
12
The International Financial System
14
How We Will Study Money, Banking, and Financial Markets
14
Exploring the Web
15
Collecting and Graphing Data
15
Web Exercises
15
Concluding Remarks
16
Summary
17
Key Terms
18
Questions
19
Applied Problems
20
Web Exercises
20
Web References
21
Appendix To Chapter 1
Defining Aggregate Output, Income, the Price Level, and the Inflation Rate
22
Aggregate Output and Income
22
Real Versus Nominal Magnitudes
22
Aggregate Price Level
23
Growth Rates and the Inflation Rate
24
ch. 2
An Overview of the Financial System
25
Function of Financial Markets
25
Structure of Financial Markets
27
Debt and Equity Markets
27
Primary and Secondary Markets
28
Exchanges and Over-the-Counter Markets
29
Money and Capital Markets
29
Financial Market Instruments
30
Money Market Instruments
30
Following the Financial News Money Market Rates
31
Capital Market Instruments
32
Following the Financial News Capital Market Interest Rates
33
Internationalization of Financial Markets
34
Global Are U.S. Capital Markets Losing Their Edge?
35
International Bond Market, Eurobonds, and Eurocurrencies
35
World Stock Markets
36
Function of Financial Intermediaries: Indirect Finance
36
Following the Financial News Foreign Stock Market Indexes
37
Transaction Costs
37
Global The Importance of Financial Intermediaries Relative to Securities Markets: An International Comparison
38
Risk Sharing
38
Asymmetric Information: Adverse Selection and Moral Hazard
39
Economies of Scope and Conflicts of Interest
41
Types of Financial Intermediaries
41
Depository Institutions
41
Contractual Savings Institutions
43
Investment Intermediaries
44
Regulation of the Financial System
45
Increasing Information Available to Investors
45
Ensuring the Soundness of Financial Intermediaries
45
Financial Regulation Abroad
48
Summary
48
Key Terms
49
Questions
49
Applied Problems
50
Web Exercises
51
Web References
51
ch. 3
What Is Money?
52
Meaning of Money
52
Functions of Money
53
Medium of Exchange
53
Unit of Account
54
Store of Value
55
Evolution of the Payments System
56
Commodity Money
56
Fiat Money
56
Checks
56
Electronic Payment
57
E-Money
57
FYI Are We Headed for a Cashless Society?
58
Measuring Money
58
The Federal Reserve's Monetary Aggregates
59
Following the Financial News: The Monetary Aggregates
60
FYI Where Are All the U.S. Dollars?
60
Summary
62
Key Terms
62
Questions
62
Applied Problems
64
Web Exercises
64
Web References
64
pt. 2
FINANCIAL MARKETS
65
ch. 4
Understanding Interest Rates
66
Measuring Interest Rates
66
Present Value
66
Application Simple Present Value
68
Application How Much Is That Jackpot Worth?
68
Four Types of Credit Market Instruments
69
Yield to Maturity
70
Application Yield to Maturity on a Simple Loan
70
Application Yield to Maturity and the Yearly Payment on a Fixed-Payment Loan
72
Application Yield to Maturity and the Bond Price for a Coupon Bond
73
Application Perpetuity
75
Global Negative T-Bill Rates? It Can Happen
77
The Distinction Between Interest Rates and Returns
77
Maturity and the Volatility of Bond Returns: Interest-Rate Risk
80
Summary
81
The Distinction Between Real and Nominal Interest Rates
81
Application Calculating Real Interest Rates
82
FYI With TIPS, Real Interest Rates Have Become Observable in the United States
84
Summary
84
Key Terms
84
Questions
85
Applied Problems
85
Web Exercises
86
Web References
87
Web Appendices
87
ch. 5
The Behavior of Interest Rates
88
Determinants of Asset Demand
88
Wealth
89
Expected Returns
89
Risk
89
Liquidity
90
Theory of Portfolio Choice
90
Supply and Demand in the Bond Market
91
Demand Curve
91
Supply Curve
92
Market Equilibrium
93
Supply and Demand Analysis
94
Changes in Equilibrium Interest Rates
94
Shifts in the Demand for Bonds
94
Shifts in the Supply of Bonds
98
Application Changes in the Interest Rate Due to Expected Inflation: The Fisher Effect
100
Application Changes in the Interest Rate Due to a Business Cycle Expansion
101
Application Explaining Low Japanese Interest Rates
103
Supply and Demand in the Market for Money: The Liquidity Preference Framework
104
Changes in Equilibrium Interest Rates in the Liquidity Preference Framework
107
Shifts in the Demand for Money
107
Shifts in the Supply of Money
107
Application Changes in the Equilibrium Interest Rate Due to Changes in Income, the Price Level, or the Money Supply
107
Changes in Income
108
Changes in the Price Level
109
Changes in the Money Supply
109
Application Money and Interest Rates
110
Does a Higher Rate of Growth of the Money Supply Lower Interest Rates?
111
Summary
114
Key Terms
115
Questions
115
Applied Problems
116
Web Exercises
117
Web References
117
Web Appendices 1, 2, 3
117
ch. 6
The Risk and Term Structure of Interest Rates
118
Risk Structure of Interest Rates
118
Default Risk
118
FYI Conflicts of Interest at Credit-Rating Agencies and the Global Financial Crisis
122
Application The Global Financial Crisis and the Baa-Treasury Spread
122
Liquidity
123
Income Tax Considerations
123
Summary
125
Application Effects of the Bush Tax Cut and Its Possible Repeal on Bond Interest Rates
125
Term Structure of Interest Rates
126
Following the Financial News Yield Curves
126
Expectations Theory
128
Segmented Markets Theory
131
Liquidity Premium and Preferred Habitat Theories
132
Evidence on the Term Structure
134
Summary
134
FYI The Yield Curve as a Forecasting Tool for Inflation and the Business Cycle
136
Application Interpreting Yield Curves, 1980--2011
136
Summary
137
Key Terms
138
Questions
138
Applied Problems
139
Web Exercises
140
Web References
140
ch. 7
The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis
141
Computing the Price of Common Stock
141
The One-Period Valuation Model
142
The Generalized Dividend Valuation Model
143
The Gordon Growth Model
143
How the Market Sets Stock Prices
144
Application Monetary Policy and Stock Prices
145
Application The Global Financial Crisis and the Stock Market
146
The Theory of Rational Expectations
146
Formal Statement of the Theory
148
Rationale Behind the Theory
148
Implications of the Theory
149
The Efficient Market Hypothesis: Rational Expectations in Financial Markets
149
Rationale Behind the Hypothesis
151
Application Practical Guide to Investing in the Stock Market
152
How Valuable Are Published Reports by Investment Advisers?
152
Should You Be Skeptical of Hot Tips?
153
Do Stock Prices Always Rise When There Is Good News?
153
FYI Should You Hire an Ape as Your Investment Adviser?
154
Efficient Market Prescription for the Investor
154
Why the Efficient Market Hypothesis Does Not Imply That Financial Markets Are Efficient
155
Application What Do Stock Market Crashes Tell Us About the Efficient Market Hypothesis and the Efficiency of Financial Markets?
156
Behavioral Finance
156
Summary
157
Key Terms
158
Questions
158
Applied Problems
159
Web Exercises
160
Web References
160
Web Appendix
160
pt. 3
FINANCIAL INSTITUTIONS
161
ch. 8
An Economic Analysis of Financial Structure
162
Basic Facts About Financial Structure Throughout the World
162
Transaction Costs
165
How Transaction Costs Influence Financial Structure
165
How Financial Intermediaries Reduce Transaction Costs
165
Asymmetric Information: Adverse Selection and Moral Hazard
166
The Lemons Problem: How Adverse Selection Influences Financial Structure
167
Lemons in the Stock and Bond Markets
168
Tools to Help Solve Adverse Selection Problems
168
FYI The Enron Implosion
170
How Moral Hazard Affects the Choice Between Debt and Equity Contracts
172
Moral Hazard in Equity Contracts: The Principal-Agent Problem
173
Tools to Help Solve the Principal-Agent Problem
174
How Moral Hazard Influences Financial Structure in Debt Markets
175
Tools to Help Solve Moral Hazard in Debt Contracts
176
Summary
178
Application Financial Development and Economic Growth
179
FYI Should We Kill All the Lawyers?
180
Application Is China a Counterexample to the Importance of Financial Development?
180
Summary
181
Key Terms
182
Questions
182
Applied Problems
183
Web Exercises
184
Web References
184
ch. 9
Financial Crises
185
What Is a Financial Crisis?
185
Dynamics of Financial Crises in Advanced Economies
186
Stage One
Initiation of Financial Crisis
186
Stage Two
Banking Crisis
188
Stage Three
Debt Deflation
189
Application The Mother of All Financial Crises: The Great Depression
189
Stock Market Crash
189
Bank Panics
190
Continuing Decline in Stock Prices
190
Debt Deflation
191
International Dimensions
191
Application The Global Financial Crisis of 2007--2009
192
Causes of the 2007--2009 Financial Crisis
192
FYI Collateralized Debt Obligations (CDOs)
193
Effects of the 2007--2009 Financial Crisis
194
Inside the Fed Was the Fed to Blame for the Housing Price Bubble?
195
Global Ireland and the 2007--2009 Financial Crisis
198
Height of the 2007--2009 Financial Crisis
198
Government Intervention and the Recovery
199
Global Worldwide Government Bailouts During the 2007--2009 Financial Crisis
200
Dynamics of Financial Crises in Emerging Market Economies
200
Stage One
Initiation of Financial Crisis
202
Stage Two
Currency Crisis
204
Stage Three
Full-Fledged Financial Crisis
205
Application Financial Crises in Mexico, 1994--1995; East Asia, 1997--1998; and Argentina, 2001--2002
206
Global The Perversion of the Financial Liberalization/Globalization Process: Chaebols and the South Korean Crisis
207
Summary
210
Key Terms
211
Questions
211
Web Exercises
212
Web References
212
ch. 10
Banking and the Management of Financial Institutions
213
The Bank Balance Sheet
213
Liabilities
213
Assets
216
Basic Banking
217
General Principles of Bank Management
220
Liquidity Management and the Role of Reserves
220
Asset Management
223
Liability Management
224
Capital Adequacy Management
225
Application Strategies for Managing Bank Capital
227
Application How a Capital Crunch Caused a Credit Crunch During the Global Financial Crisis
228
Managing Credit Risk
229
Screening and Monitoring
229
Long-Term Customer Relationships
231
Loan Commitments
231
Collateral and Compensating Balances
231
Credit Rationing
232
Managing Interest-Rate Risk
233
Gap and Duration Analysis
233
Application Strategies for Managing Interest-Rate Risk
235
Off-Balance-Sheet Activities
235
Loan Sales
235
Generation of Fee Income
236
Trading Activities and Risk Management Techniques
236
Global Barings, Daiwa, Sumitomo, and Societe Generale: Rogue Traders and the Principal-Agent Problem
237
Summary
238
Key Terms
239
Questions
239
Applied Problems
240
Web Exercises
241
Web References
241
Web Appendices 1, 2
241
ch. 11
Economic Analysis of Financial Regulation
242
Asymmetric Information and Financial Regulation
242
Government Safety Net
242
Global The Spread of Government Deposit Insurance Throughout the World: Is This a Good Thing?
244
Restrictions on Asset Holdings
247
Capital Requirements
247
Prompt Corrective Action
248
Global Where Is the Basel Accord Heading After the Global Financial Crisis?
249
Financial Supervision: Chartering and Examination
250
Assessment of Risk Management
251
Disclosure Requirements
252
Consumer Protection
252
FYI Mark-to-Market Accounting and the Global Financial Crisis
253
FYI The Subprime Mortgage Crisis and Consumer Protection Regulation
254
Restrictions on Competition
255
Macroprudential Versus Microprudential Supervision
255
Global International Financial Regulation
256
Summary
257
The 1980s Savings and Loan and Banking Crisis
259
Banking Crises Throughout the World
261
"Deja vu All Over Again"
261
The Dodd-Frank Bill and Future Regulation
262
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
264
Future Regulation
265
Summary
266
Key Terms
266
Questions
267
Applied Problems
267
Web Exercises
268
Web References
268
Web Appendices 1, 2
268
ch. 12
Banking Industry: Structure and Competition
269
Historical Development of the Banking System
269
Multiple Regulatory Agencies
271
Financial Innovation and the Growth of the "Shadow Banking System"
272
Responses to Changes in Demand Conditions: Interest-Rate Volatility
273
Responses to Changes in Supply Conditions: Information Technology
274
FYI Will "Clicks" Dominate "Bricks" in the Banking Industry?
276
Avoidance of Existing Regulations
277
FYI Bruce Bent and the Money Market Mutual Fund Panic of 2008
279
Financial Innovation and the Decline of Traditional Banking
280
Structure of the U.S. Commercial Banking Industry
283
Restrictions on Branching
284
Response to Branching Restrictions
285
Bank Consolidation and Nationwide Banking
286
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
288
What Will the Structure of the U.S. Banking Industry Look Like in the Future?
288
Global Comparison of Banking Structure in the United States and Abroad
289
Are Bank Consolidation and Nationwide Banking Good Things?
289
Separation of the Banking and Other Financial Service Industries
290
Erosion of Glass-Steagall
290
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999: Repeal of Glass-Steagall
290
Implications for Financial Consolidation
291
Separation of Banking and Other Financial Services Industries Throughout the World
291
FYI The Global Financial Crisis and the Demise of Large, Free-Standing Investment Banks
292
Thrift Industry: Regulation and Structure
292
Savings and Loan Associations
292
Mutual Savings Banks
293
Credit Unions
293
International Banking
294
Eurodollar Market
294
Global Ironic Birth of the Eurodollar Market
295
Structure of U.S. Banking Overseas
295
Foreign Banks in the United States
296
Summary
297
Key Terms
298
Questions
298
Web Exercises
299
Web References
300
pt. 4
CENTRAL BANKING AND THE CONDUCT OF MONETARY POLICY
301
ch. 13
Central Banks and the Federal Reserve System
302
Origins of the Federal Reserve System
302
Inside the Fed The Political Genius of the Founders of the Federal Reserve System
303
Structure of the Federal Reserve System
303
Federal Reserve Banks
304
Member Banks
306
Inside the Fed The Special Role of the Federal Reserve Bank of New York
307
Board of Governors of the Federal Reserve System
308
Federal Open Market Committee (FOMC)
308
Inside the Fed The Role of the Research Staff
309
Inside the Fed The FOMC Meeting
310
Why the Chairman of the Board of Governors Really Runs the Show
311
Inside the Fed Green, Blue, Teal, and Beige: What Do These Colors Mean at the Fed?
311
How Independent Is the Fed?
312
Should the Fed Be Independent?
313
Inside the Fed How Bernanke's Style Differs from Greenspan's
314
The Case for Independence
315
The Case Against Independence
316
Central Bank Independence and Macroeconomic Performance Throughout the World
316
Explaining Central Bank Behavior
317
Inside the Fed The Evolution of the Fed's Communication Strategy
318
Structure and Independence of the European Central Bank
318
Differences Between the European System of Central Banks and the Federal Reserve System
319
Governing Council
319
How Independent Is the ECB?
320
Structure and Independence of Other Foreign Central Banks
321
Bank of Canada
321
Bank of England
321
Bank of Japan
322
The Trend Toward Greater Independence
322
Summary
322
Key Terms
323
Questions
323
Web Exercises
324
Web References
324
ch. 14
The Money Supply Process
325
Three Players in the Money Supply Process
325
The Fed's Balance Sheet
325
Liabilities
326
Assets
327
Control of the Monetary Base
327
Federal Reserve Open Market Operations
328
Shifts from Deposits into Currency
331
Loans to Financial Institutions
332
Other Factors That Affect the Monetary Base
332
Overview of the Fed's Ability to Control the Monetary Base
333
Multiple Deposit Creation: A Simple Model
334
Deposit Creation: The Single Bank
334
Deposit Creation: The Banking System
335
Deriving the Formula for Multiple Deposit Creation
338
Critique of the Simple Model
339
Factors That Determine the Money Supply
340
Changes in the Nonborrowed Monetary Base, MBn
340
Changes in Borrowed Reserves, BR, from the Fed
340
Changes in the Required Reserve Ratio, rr
340
Changes in Currency Holdings
340
Changes in Excess Reserves
341
Overview of the Money Supply Process
341
The Money Multiplier
342
Deriving the Money Multiplier
342
Intuition Behind the Money Multiplier
344
Money Supply Response to Changes in the Factors
345
Application The Great Depression Bank Panics, 1930--1933, and the Money Supply
346
Application The 2007--2009 Financial Crisis and the Money Supply
348
Summary
351
Key Terms
351
Questions
352
Applied Problems
352
Web Exercises
353
Web References
354
Web Appendices 1, 2,3
354
ch. 15
Tools of Monetary Policy
355
The Market for Reserves and the Federal Funds Rate
355
Demand and Supply in the Market for Reserves
355
Inside the Fed Why Does the Fed Need to Pay Interest on Reserves?
357
How Changes in the Tools of Monetary Policy Affect the Federal Funds Rate
358
Application How the Federal Reserve's Operating Procedures Limit Fluctuations in the Federal Funds Rate
362
Conventional Monetary Policy Tools
364
Open Market Operations
364
Inside the Fed A Day at the Trading Desk
365
Discount Policy and the Lender of Last Resort
366
Inside the Fed Using Discount Policy to Prevent a Financial Panic
368
Reserve Requirements
369
Interest on Reserves
370
Relative Advantages of the Different Tools
370
Nonconventional Monetary Policy Tools During the Global Financial Crisis
371
Liquidity Provision
371
Asset Purchases
372
Inside the Fed Fed Lending Facilities During the Global Financial Crisis
373
Quantitative Easing Versus Credit Easing
372
Commitment to Future Policy Actions
374
Monetary Policy Tools of the European Central Bank
375
Open Market Operations
376
Lending to Banks
376
Reserve Requirements
376
Summary
377
Key Terms
377
Questions
378
Applied Problems
379
Web Exercises
379
Web References
379
ch. 16
The Conduct of Monetary Policy: Strategy and Tactics
380
The Price Stability Goal and the Nominal Anchor
380
The Role of a Nominal Anchor
381
The Time-Inconsistency Problem
381
Other Goals of Monetary Policy
382
High Employment and Output Stability
382
Economic Growth
383
Stability of Financial Markets
383
Interest-Rate Stability
383
Stability in Foreign Exchange Markets
383
Should Price Stability be the Primary Goal of Monetary Policy?
384
Hierarchical Versus Dual Mandates
384
Price Stability as the Primary, Long-Run Goal of Monetary Policy
385
Inflation Targeting
385
Inflation Targeting in New Zealand, Canada, and the United Kingdom
386
Advantages of Inflation Targeting
388
Disadvantages of Inflation Targeting
389
The Federal Reserve's Monetary Policy Strategy
391
Advantages of the Fed's "Just Do It" Approach
392
Disadvantages of the Fed's "Just Do It" Approach
392
Lessons for Monetary Policy Strategy from the Global Financial Crisis
393
Inside the Fed Chairman Bernanke and Inflation Targeting
394
Implications for Inflation Targeting
395
How Should Central Banks Respond to Asset-Price Bubbles?
396
Tactics: Choosing the Policy Instrument
400
Criteria for Choosing the Policy Instrument
402
Tactics: The Taylor Rule
403
Inside the Fed The Fed's Use of the Taylor Rule
406
Inside the Fed Fed Watchers
406
Summary
407
Key Terms
407
Questions
408
Applied Problems
409
Web Exercises
409
Web References
410
Web Appendix
410
Appendix To Chapter 16
Fed Policy Procedures: Historical Perspective
411
The Early Years: Discount Policy as the Primary Tool
411
Discovery of Open Market Operations
412
The Great Depression
412
Inside the Fed Bank Panics of 1930--1933: Why Did the Fed Let Them Happen?
413
Reserve Requirements as a Policy Tool
413
War Finance and the Pegging of Interest Rates: 1942--1951
414
Targeting Money Market Conditions: the 1950s and 1960s
414
Targeting Monetary Aggregates: the 1970s
415
New Fed Operating Procedures: October 1979-October 1982
416
De-Emphasis of Monetary Aggregates: October 1982-Early 1990s
417
Federal Funds Targeting Again: Early 1990s and Beyond
418
Preemptive Strikes Against Inflation
418
Preemptive Strikes Against Economic Downturns and Financial Disruptions: LTCM, Enron, and the Global Financial Crisis
419
International Considerations
419
pt. 5
INTERNATIONAL FINANCE AND MONETARY POLICY
421
ch. 17
The Foreign Exchange Market
422
Foreign Exchange Market
422
What Are Foreign Exchange Rates?
423
Following the Financial News Foreign Exchange Rates
424
Why Are Exchange Rates Important?
424
How Is Foreign Exchange Traded?
425
Exchange Rates in the Long Run
425
Law of One Price
425
Theory of Purchasing Power Parity
426
Why the Theory of Purchasing Power Parity Cannot Fully Explain Exchange Rates
427
Factors That Affect Exchange Rates in the Long Run
428
Exchange Rates in the Short Run: A Supply and Demand Analysis
429
Supply Curve for Domestic Assets
430
Demand Curve for Domestic Assets
431
Equilibrium in the Foreign Exchange Market
431
Explaining Changes in Exchange Rates
431
Shifts in the Demand for Domestic Assets
432
Recap: Factors That Change the Exchange Rate
434
Application Effects of Changes in Interest Rates on the Equilibrium Exchange Rate
436
Application Why Are Exchange Rates So Volatile?
437
Application The Dollar and Interest Rates
438
Application The Global Financial Crisis and the Dollar
439
Summary
440
Key Terms
440
Questions
441
Applied Problems
441
Web Exercises
442
Web References
442
Appendix To Chapter 17
The Interest Parity Condition
443
Comparing Expected Returns on Domestic and Foreign Assets
443
Interest Parity Condition
445
ch. 18
The International Financial System
446
Intervention in the Foreign Exchange Market
446
Foreign Exchange Intervention and the Money Supply
446
Inside the Fed A Day at the Federal Reserve Bank of New York's Foreign Exchange Desk
447
Unsterilized Intervention
449
Sterilized Intervention
450
Balance of Payments
450
Global Why the Large U.S. Current Account Deficit Worries Economists
451
Exchange Rate Regimes in the International Financial System
452
Gold Standard
452
The Bretton Woods System
453
Global The Euro's Challenge to the Dollar
454
How a Fixed Exchange Rate Regime Works
454
Application How Did China Accumulate Over $3 Trillion of International Reserves?
457
Managed Float
458
European Monetary System (EMS)
459
Application The Foreign Exchange Crisis of September 1992
460
Application Recent Foreign Exchange Crises in Emerging Market Countries: Mexico 1994, East Asia 1997, Brazil 1999, and Argentina 2002
462
Capital Controls
463
Controls on Capital Outflows
463
Controls on Capital Inflows
463
The Role of the IMF
464
Should the IMF Be an International Lender of Last Resort?
464
How Should the IMF Operate?
465
Global The Global Financial Crisis and the IMF
467
International Considerations and Monetary Policy
467
Direct Effects of the Foreign Exchange Market on Monetary Policy
467
Balance-of-Payments Considerations
468
Exchange Rate Considerations
468
To Peg or Not to Peg: Exchange-Rate Targeting as an Alternative Monetary Policy Strategy
469
Advantages of Exchange-Rate Targeting
469
Disadvantages of Exchange-Rate Targeting
470
When Is Exchange-Rate Targeting Desirable for Industrialized Countries?
472
When Is Exchange-Rate Targeting Desirable for Emerging Market Countries?
473
Currency Boards
473
Global Argentina's Currency Board
474
Dollarization
474
Summary
475
Key Terms
476
Questions
476
Applied Problems
477
Web Exercises
478
Web References
478
pt. 6
MONETARY THEORY
479
ch. 19
Quantity Theory, Inflation, and the Demand for Money
480
Quantity Theory of Money
480
Velocity of Money and Equation of Exchange
480
From the Equation of Exchange to the Quantity Theory of Money
482
Quantity Theory and the Price Level
483
Quantity Theory and Inflation
483
Application Testing the Quantity Theory of Money
484
Budget Deficits and Inflation
486
Government Budget Constraint
486
Hyperinflation
488
Application The Zimbabwean Hyperinflation
488
Keynesian Theories of Money Demand
488
Transactions Motive
489
Precautionary Motive
489
Speculative Motive
489
Putting the Three Motives Together
489
Portfolio Theories of Money Demand
490
Theory of Portfolio Choice and Keynesian Liquidity Preference
490
Other Factors That Affect the Demand for Money
491
Summary
491
Empirical Evidence for the Demand for Money
492
Interest Rates and Money Demand
492
Stability of Money Demand
493
Summary
493
Key Terms
494
Questions
494
Applied Problems
495
Web Exercises
496
Web References
496
Web Appendices 1, 2
496
ch. 20
The IS Curve
497
Planned Expenditure and Aggregate Demand
497
The Components of Aggregate Demand
498
Consumption Expenditure
498
FYI Meaning of the Word Investment
499
Planned Investment Spending
499
Net Exports
501
Government Purchases and Taxes
502
Goods Market Equilibrium
503
Solving for Goods Market Equilibrium
503
Deriving the IS Curve
504
Understanding the IS Curve
504
What the IS Curve Tells Us: Intuition
504
What the IS Curve Tells Us: Numerical Example
504
Why the Economy Heads Toward the Equilibrium
505
Factors that Shift the IS Curve
506
Changes in Government Purchases
506
Application The Vietnam War Buildup, 1964--1969
506
Changes in Taxes
507
Application The Fiscal Stimulus Package of 2009
508
Changes in Autonomous Spending
509
Changes in Financial Frictions
510
Summary of Factors That Shift the IS Curve
510
Summary
511
Key Terms
512
Questions
512
Applied Problems
513
Web Exercises
514
Web References
514
ch. 21
The Monetary Policy and Aggregate Demand Curves
515
The Federal Reserve and Monetary Policy
515
The Monetary Policy Curve
516
The Taylor Principle: Why the Monetary Policy Curve Has an Upward Slope
516
Shifts in the MP Curve
517
Application Autonomous Monetary Easing at the Onset of the 2007--2009 Financial Crisis
518
The Aggregate Demand Curve
519
Deriving the Aggregate Demand Curve Graphically
519
Factors That Shift the Aggregate Demand Curve
520
FYI Deriving the Aggregate Demand Curve Algebraically
520
Summary
525
Key Terms
525
Questions
525
Applied Problems
526
Web Exercises
527
Web References
527
ch. 22
Aggregate Demand and Supply Analysis
528
Aggregate Demand
528
Following the Financial News: Aggregate Output, Unemployment, and Inflation
529
Deriving the Aggregate Demand Curve
529
Factors That Shift the Aggregate Demand Curve
530
Aggregate Supply
533
Long-Run Aggregate Supply Curve
533
Short-Run Aggregate Supply Curve
534
Shifts in Aggregate Supply Curves
536
Shifts in the Long-Run Aggregate Supply Curve
536
Shifts in the Short-Run Aggregate Supply Curve
537
Equilibrium in Aggregate Demand and Supply Analysis
540
Short-Run Equilibrium
540
How the Short-Run Equilibrium Moves to the Long-Run Equilibrium over Time
540
Self-Correcting Mechanism
543
Changes in Equilibrium: Aggregate Demand Shocks
543
Application The Volcker Disinflation, 1980--1986
545
Application Negative Demand Shocks, 2001--2004
545
Changes in Equilibrium: Aggregate Supply (Price) Shocks
547
Temporary Supply Shocks
548
Application Negative Supply Shocks, 1973--1975 and 1978--1980
548
Permanent Supply Shocks and Real Business Cycle Theory
549
Application Positive Supply Shocks, 1995--1999
552
Conclusions
552
Application Negative Supply and Demand Shocks and the 2007--2009 Financial Crisis
554
AD/AS Analysis of Foreign Business Cycle Episodes
554
Application The United Kingdom and the 2007--2009 Financial Crisis
556
Application China and the 2007--2009 Financial Crisis
557
Summary
557
Key Terms
559
Questions
559
Applied Problems
560
Web Exercises
560
Web References
561
Web Appendices 1, 2, 3, 4
561
Appendix To Chapter 22
The Phillips Curve and the Short-Run Aggregate Supply Curve
562
The Phillips Curve
562
Phillips Curve Analysis in the 1960s
562
The Friedman-Phelps Phillips Curve Analysis
563
FYI The Phillips Curve Tradeoff and Macroeconomic Policy in the 1960s
564
The Phillips Curve After the 1960s
566
The Modern Phillips Curve
566
The Modern Phillips Curve with Adaptive (Backward-Looking) Expectations
566
The Short-Run Aggregate Supply Curve
567
ch. 23
Monetary Policy Theory
570
Response of Monetary Policy to Shocks
570
Response to an Aggregate Demand Shock
571
Application Quantitative (Credit) Easing in Response to the Global Financial Crisis
573
Response to a Permanent Supply Shock
573
Response to a Temporary Supply Shock
575
The Bottom Line: The Relationship Between Stabilizing Inflation and Stabilizing Economic Activity
577
How Actively Should Policymakers Try to Stabilize Economic Activity?
578
Lags and Policy Implementation
578
Inflation: Always and Everywhere a Monetary Phenomenon
579
FYI The Activist/Nonactivist Debate over the Obama Fiscal Stimulus Package
580
Causes of Inflationary Monetary Policy
580
High Employment Targets and Inflation
581
Application The Great Inflation
584
Summary
586
Key Terms
586
Questions
587
Applied Problems
588
Web Exercises
588
Web References
588
ch. 24
The Role of Expectations in Monetary Policy
589
Lucas Critique of Policy Evaluation
589
Econometric Policy Evaluation
590
Application The Term Structure of Interest Rates
590
Policy Conduct: Rules or Discretion?
591
Discretion and the Time-Inconsistency Problem
591
Types of Rules
592
The Case for Rules
592
FYI The Political Business Cycle and Richard Nixon
593
The Case for Discretion
593
Constrained Discretion
594
Global The Demise of Monetary Targeting in Switzerland
594
The Role of Credibility and a Nominal Anchor
595
Benefits of a Credible Nominal Anchor
595
Credibility and Aggregate Demand Shocks
596
Credibility and Aggregate Supply Shocks
598
Application A Tale of Three Oil Price Shocks
599
Credibility and Anti-Inflation Policy
600
Global Ending the Bolivian Hyperinflation: A Successful Anti-Inflation Program
602
Application Credibility and the Reagan Budget Deficits
603
Approaches to Establishing Central Bank Credibility
603
Inside the Fed The Appointment of Paul Volcker, Anti-Inflation Hawk
604
Appoint "Conservative" Central Bankers
604
Summary
605
Key Terms
605
Questions
606
Applied Problems
607
Web Exercises
607
Web References
607
ch. 25
Transmission Mechanisms of Monetary Policy
608
Transmission Mechanisms of Monetary Policy
608
Traditional Interest-Rate Channels
609
Other Asset Price Channels
610
Credit View
613
FYI Consumers' Balance Sheets and the Great Depression
616
Why Are Credit Channels Likely to Be Important?
616
Application The Great Recession
617
Lessons for Monetary Policy
617
Application Applying the Monetary Policy Lessons to Japan
619
Summary
620
Key Terms
620
Questions
620
Applied Problems
621
Web Exercises
622
Web References
622
Web Appendix
622
Glossary
1
Credits
1
Index
1