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Table of Contents
About the Author
Acknowledgments
Preface
1
Money, Banking, and Your World
1.1
Dreams Dashed
1.2
Hope Springs
1.3
Suggested Browsing
1.4
Suggested Reading
2
The Financial System
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2.1
Evil and Brilliant Financiers?
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2.2
Financial Systems
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2.3
Asymmetric Information: The Real Evil
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2.4
Financial Instruments
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2.5
Financial Markets
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2.6
Financial Intermediaries
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2.7
Competition Between Markets and Intermediaries
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2.8
Regulation
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2.9
Suggested Reading
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3
Money
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3.1
Of Love, Money, and Transactional Efficiency
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3.2
Better to Have Had Money and Lost It Than to Have Never Had Money at All
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3.3
A Short History of Moolah
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3.4
Commodity and Credit Monies
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3.5
Measuring Money
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3.6
Suggested Reading
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4
Interest Rates
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4.1
The Interest of Interest
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4.2
Present and Future Value
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4.3
Compounding Periods
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4.4
Pricing Debt Instruments
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4.5
What’s the Yield on That?
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4.6
Calculating Returns
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4.7
Inflation and Interest Rates
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4.8
Suggested Reading
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5
The Economics of Interest Rate Fluctuations
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5.1
Interest Rate Fluctuations
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5.2
Shifts in Supply and Demand for Bonds
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5.3
Predictions and Effects
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5.4
Suggested Reading
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6
The Economics of Interest-Rate Spreads and Yield Curves
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6.1
Interest-Rate Determinants I: The Risk Structure
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6.2
The Determinants of Interest Rates II: The Term Structure
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6.3
Suggested Reading
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7
Rational Expectations, Efficient Markets, and the Valuation of Corporate Equities
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7.1
The Theory of Rational Expectations
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7.2
Valuing Corporate Equities
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7.3
Financial Market Efficiency
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7.4
Evidence of Market Efficiency
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7.5
Suggested Reading
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8
Financial Structure, Transaction Costs, and Asymmetric Information
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8.1
The Sources of External Finance
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8.2
Transaction Costs, Asymmetric Information, and the Free-Rider Problem
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8.3
Adverse Selection
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8.4
Moral Hazard
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8.5
Agency Problems
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8.6
Suggested Reading
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9
Bank Management
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9.1
The Balance Sheet
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9.2
Assets, Liabilities, and T-Accounts
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9.3
Bank Management Principles
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9.4
Credit Risk
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9.5
Interest-Rate Risk
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9.6
Off the Balance Sheet
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9.7
Suggested Reading
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10
Innovation and Structure in Banking and Finance
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10.1
Early Financial Innovations
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10.2
Innovations Galore
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10.3
Loophole Mining and Lobbying
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10.4
Banking on Technology
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10.5
Banking Industry Profitability and Structure
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10.6
Suggested Reading
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11
The Economics of Financial Regulation
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11.1
Market Failures and Public Choice
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11.2
The Great Depression as Regulatory Failure
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11.3
The Savings and Loan Regulatory Debacle
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11.4
Better but Still Not Good: U.S. Regulatory Reforms
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11.5
Basel II, Basel III, and Dodd-Frank
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11.6
Suggested Reading
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12
Financial Derivatives
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12.1
Derivatives and Their Functions
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12.2
Forwards and Futures
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12.3
Options and Swaps
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12.4
Suggested Reading
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13
Financial Crises: Causes and Consequences
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13.1
Financial Crisis Taxonomies
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13.2
Asset Bubbles
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13.3
Financial Panics
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13.4
Lender of Last Resort (LLR)
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13.5
Bailouts and Resolutions
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13.6
The Crisis of 2007–2009
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13.7
Islamic Banking and Financial Stability
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13.8
Suggested Reading
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14
Central Bank Form and Function
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14.1
America’s Central Banks
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14.2
The Federal Reserve System’s Structure
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14.3
Other Important Central Banks
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14.4
Central Bank Independence
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14.5
Suggested Reading
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15
The Money Supply Process and the Money Multipliers
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15.1
The Central Bank’s Balance Sheet
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15.2
Open Market Operations
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15.3
A Simple Model of Multiple Deposit Creation
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15.4
A More Sophisticated Money Multiplier for M1
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15.5
The M2 Money Multiplier
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15.6
Summary and Explanation
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15.7
Suggested Reading
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16
Monetary Policy Tools
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16.1
The Federal Funds Market and Reserves
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16.2
Open Market Operations and the Discount Window
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16.3
Additional Policy Tools
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16.4
Suggested Reading
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17
Monetary Policy Targets and Goals
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17.1
A Short History of Fed Blunders
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17.2
Central Bank Goal Trade-offs
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17.3
Central Bank Targets
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17.4
The Taylor Rule
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17.5
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18
Foreign Exchange
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18.1
The Economic Importance of Currency Markets
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18.2
Determining the Exchange Rate
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18.3
Long-Run Determinants of Exchange Rates
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18.4
Short-Run Determinants of Exchange Rates
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18.5
Modeling the Market for Foreign Exchange
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18.6
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19
International Monetary Regimes
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19.1
The Trilemma, or Impossible Trinity
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19.2
Two Systems of Fixed Exchange Rates
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19.3
The Managed or Dirty Float
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19.4
The Choice of International Policy Regime
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19.5
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20
Money Demand
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20.1
The Simple Quantity Theory and the Liquidity Preference Theory of Keynes
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20.2
Friedman’s Modern Quantity Theory of Money
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20.3
The Policy Failure of the Modern Quantity Theory of Money
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20.4
Suggested Reading
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21
IS-LM
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21.1
Aggregate Output and Keynesian Cross Diagrams
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21.2
The IS-LM Model
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21.3
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22
IS-LM in Action
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22.1
Shifting Curves: Causes and Effects
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22.2
Implications for Monetary Policy
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22.3
Aggregate Demand Curve
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22.4
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23
Aggregate Supply and Demand and the Growth Diamond
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23.1
Aggregate Demand
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23.2
Aggregate Supply
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23.3
Equilibrium Analysis
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23.4
The Growth Diamond
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23.5
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24
Monetary Policy Transmission Mechanisms
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24.1
Modeling Reality
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24.2
How Important Is Monetary Policy?
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24.3
Transmission Mechanisms
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24.4
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25
Inflation and Money
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25.1
Empirical Evidence of a Money-Inflation Link
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25.2
Why Have Central Bankers So Often Gotten It Wrong?
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25.3
Suggested Reading
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26
Rational Expectations Redux: Monetary Policy Implications
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26.1
Rational Expectations
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26.2
New Keynesians
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26.3
Inflation Busting
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26.4
Suggested Reading
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