Money and Banking
v. 2.0
Table of Contents
Licensing Information
Preface
Chapter 1: Money, Banking, and Your World
Chapter Introduction
Dreams Dashed
Hope Springs
Suggested Browsing
Suggested Reading
Chapter 2: The Financial System
Chapter Introduction
Evil and Brilliant Financiers?
Financial Systems
Asymmetric Information: The Real Evil
Financial Instruments
Financial Markets
Financial Intermediaries
Competition Between Markets and Intermediaries
Regulation
Suggested Reading
Chapter 3: Money
Chapter Introduction
Of Love, Money, and Transactional Efficiency
Better to Have Had Money and Lost It Than to Have Never Had Money at All
A Short History of Moolah
Commodity and Credit Monies
Measuring Money
Suggested Reading
Chapter 4: Interest Rates
Chapter Introduction
The Interest of Interest
Present and Future Value
Compounding Periods
Pricing Debt Instruments
What’s the Yield on That?
Calculating Returns
Inflation and Interest Rates
Suggested Reading
Chapter 5: The Economics of Interest-Rate Fluctuations
Chapter Introduction
Interest Rate Fluctuations
Shifts in Supply and Demand for Bonds
Predictions and Effects
Suggested Reading
Chapter 6: The Economics of Interest-Rate Spreads and Yield Curves
Chapter Introduction
Interest-Rate Determinants I: The Risk Structure
The Determinants of Interest Rates II: The Term Structure
Suggested Reading
Chapter 7: Rational Expectations, Efficient Markets, and the Valuation of Corporate Equities
Chapter Introduction
The Theory of Rational Expectations
Valuing Corporate Equities
Financial Market Efficiency
Evidence of Market Efficiency
Suggested Reading
Chapter 8: Financial Structure, Transaction Costs, and Asymmetric Information
Chapter Introduction
The Sources of External Finance
Transaction Costs, Asymmetric Information, and the Free-Rider Problem
Adverse Selection
Moral Hazard
Agency Problems
Suggested Reading
Chapter 9: Bank Management
Chapter Introduction
The Balance Sheet
Assets, Liabilities, and T-Accounts
Bank Management Principles
Credit Risk
Interest-Rate Risk
Off the Balance Sheet
Suggested Reading
Chapter 10: Innovation and Structure in Banking and Finance
Chapter Introduction
Early Financial Innovations
Innovations Galore
Loophole Mining and Lobbying
Banking on Technology
Banking Industry Profitability and Structure
Suggested Reading
Chapter 11: The Economics of Financial Regulation
Chapter Introduction
Market Failures and Public Choice
The Great Depression as Regulatory Failure
The Savings and Loan Regulatory Debacle
Better but Still Not Good: U.S. Regulatory Reforms
Basel II, Basel III, and Dodd-Frank
Suggested Reading
Chapter 12: Financial Derivatives
Chapter Introduction
Derivatives and Their Functions
Forwards and Futures
Options and Swaps
Suggested Reading
Chapter 13: Financial Crises: Causes and Consequences
Chapter Introduction
Financial Crisis Taxonomies
Asset Bubbles
Financial Panics
Lender of Last Resort (LLR)
Bailouts and Resolutions
The Crisis of 2007-2009
Suggested Reading
Chapter 14: Central Bank Form and Function
Chapter Introduction
America’s Central Banks
The Federal Reserve System’s Structure
Other Important Central Banks
Central Bank Independence
Suggested Reading
Chapter 15: The Money Supply Process and the Money Multipliers
Chapter Introduction
The Central Bank’s Balance Sheet
Open Market Operations
A Simple Model of Multiple Deposit Creation
A More Sophisticated Money Multiplier for M1
The M2 Money Multiplier
Summary and Explanation
Suggested Reading
Chapter 16: Monetary Policy Tools
Chapter Introduction
The Federal Funds Market and Reserves
Open Market Operations and the Discount Window
The Monetary Policy Tools of Other Central Banks
Suggested Reading
Chapter 17: Monetary Policy Targets and Goals
Chapter Introduction
A Short History of Fed Blunders
Central Bank Goal Trade-offs
Central Bank Targets
The Taylor Rule
Suggested Reading
Chapter 18: Foreign Exchange
Chapter Introduction
The Economic Importance of Currency Markets
Determining the Exchange Rate
Long-Run Determinants of Exchange Rates
Short-Run Determinants of Exchange Rates
Modeling the Market for Foreign Exchange
Suggested Reading
Chapter 19: International Monetary Regimes
Chapter Introduction
The Trilemma, or Impossible Trinity
Two Systems of Fixed Exchange Rates
The Managed or Dirty Float
The Choice of International Policy Regime
Suggested Reading
Chapter 20: Money Demand
Chapter Introduction
The Simple Quantity Theory and the Liquidity Preference Theory of Keynes
Friedman’s Modern Quantity Theory of Money
The Policy Failure of the Modern Quantity Theory of Money
Suggested Reading
Chapter 21: IS-LM
Chapter Introduction
Aggregate Output and Keynesian Cross Diagrams
The IS-LM Model
Suggested Reading
Chapter 22: IS-LM in Action
Chapter Introduction
Shifting Curves: Causes and Effects
Implications for Monetary Policy
Aggregate Demand Curve
Suggested Reading
Chapter 23: Aggregate Supply and Demand and the Growth Diamond
Chapter Introduction
Aggregate Demand
Aggregate Supply
Equilibrium Analysis
The Growth Diamond
Suggested Reading
Chapter 24: Monetary Policy Transmission Mechanisms
Chapter Introduction
Modeling Reality
How Important Is Monetary Policy?
Transmission Mechanisms
Suggested Reading
Chapter 25: Inflation and Money
Chapter Introduction
Empirical Evidence of a Money-Inflation Link
Why Have Central Bankers So Often Gotten It Wrong?
Suggested Reading
Chapter 26: Rational Expectations Redux: Monetary Policy Implications
Chapter Introduction
Rational Expectations
New Keynesians
Inflation Busting
Suggested Reading