Economics of Money, Banking, and Financial Markets, 10th Edition

Book Preface

Hallmarks
Although this text has undergone a major revision, it retains the basic hallmarks  that have made it the best-selling textbook on money and banking over the past  nine editions:

• A unifying, analytic framework that uses a few basic economic principles to organize  students’ thinking about the structure of financial markets, the foreign exchange  markets, financial institution management, and the role of monetary policy in the  economy
• A careful, step-by-step development of models (an approach found in the best principles of economics textbooks), which makes it easier for students to learn
• The complete integration of an international perspective throughout the text
• A thoroughly up-to-date treatment of the latest developments in monetary theory
• A special feature called “Following the Financial News” to encourage reading of a  financial newspaper
• An applications-oriented perspective with numerous applications and special-topic boxes that increase students’ interest by showing them how to apply theory to realworld examples

What’s New In The Tenth Edition
In addition to the expected updating of all data through 2011 whenever possible, there  is major new material in every part of the text.
The Business School Edition
I am pleased to continue providing two versions of The Economics of Money, Banking,  and Financial Markets. While both versions contain the core chapters that all professors want to cover, The Economics of Money, Banking, and Financial Markets, Business  School Edition, is designed for those professors who prefer to focus more on finance,  or who simply do not cover as much monetary theory. The Business School Edition  includes not only chapters on nonbank finance and financial derivatives, but also an  entire chapter on the conflicts of interest in the financial industry. The Business School Edition omits the chapters on the IS curve and on the monetary policy and aggregate  demand curves as well as the chapter on the role of expectations in monetary policy.
For those professors whose courses have less of an emphasis on monetary theory, The  Economics of Money, Banking, and Financial Markets, Business School Edition, will more  closely fit your needs.
For those professors who want a comprehensive discussion of monetary theory and  monetary policy, The Economics of Money, Banking, and Financial Markets, Tenth Edition,  contains all of the chapters on monetary theory. Professors who do want this coverage  are often hard-pressed to cover all the finance and institutions chapters. To that end, the Tenth Edition omits the chapters on nonbank finance, financial derivatives, and conflicts of interest. The Companion Website, which can be found at www.pearsonhighered.com/mishkin for each edition provides the omitted chapters, making them readily  available for those who do wish to utilize them in their courses.
Revised Chapter 9: Financial Crises
The previous edition of this textbook contained a new chapter on financial crises,  including the most recent one. It was written, however, before the global financial crisis  was over. Now with the perspective of a couple of years after the crisis, I have been able  to improve this chapter substantially, first, by completely reorganizing the chapter to  tell a more coherent story and second, by adding new sections, such as the run on the  shadow banking system. In addition, I have added new boxes on collateralized debt  obligations (CDOs), Ireland and the financial crisis, and whether the Federal Reserve  was to blame for the housing bubble. The material in this chapter continues to be very exciting for students. Indeed, students continue to be more engaged with this material than with anything else I have taught in my entire teaching career of over 30 years.
Compelling New Material on the Global Financial Crisis  Throughout the Text
The aftermath of the global financial crisis of 2007–2009 has led to ongoing changes  in the structure of the financial system and the way central banks operate. This has  required the addition of many timely new sections, applications, and boxes throughout  the rest of the book.
• A new box on Ireland and the 2007–2009 financial crisis (Chapter 9)
• A new Inside the Fed box on whether the Fed was to blame for the housing price  bubble (Chapter 9)
• A new section on the Dodd-Frank bill and future regulation (Chapter 11)
• A new box on where the Basel Accord is heading after the global financial crisis  (Chapter 11)
• A new box on the money supply during the 2007–2009 financial crisis (Chapter 14)
• A new section on nonconventional monetary policy tools (Chapter 15)
• A new section on quantitative versus credit easing (Chapter 15)
• A new Inside the Fed box on Federal Reserve lending facilities during the global  financial crisis (Chapter 15)
• A new section on lessons for monetary policy strategy from the global financial crisis (Chapter 16)
• A new application on the fiscal stimulus package of 2009 (Chapter 20)
• A new application on autonomous monetary policy easing at the onset of the global  financial crisis (Chapter 21)
• A new application on negative supply and demand shocks and the 2007–2009  financial crisis (Chapter 22)
• A new application on the United Kingdom and the 2007–2009 financial crisis  (Chapter 22)
• A new application on China and the 2007–2009 financial crisis (Chapter 22)
• A new application on quantitative (credit) easing in response to the global financial  crisis (Chapter 23)
• A new box on the activist/nonactivist debate over the Obama fiscal stimulus package (Chapter 23)

Brief Contents
PART 1 Introduction 1
1 Why Study Money, Banking, and Financial Markets?………………………………….. 2
2 An Overview of the Financial System ……………………………………………………… 25
3 What Is Money? …………………………………………………………………………………… 52
PART 2 Financial Markets 65
4 Understanding Interest Rates…………………………………………………………………. 66
5 The Behavior of Interest Rates………………………………………………………………… 88
6 The Risk and Term Structure of Interest Rates………………………………………… 118
7 The Stock Market, the Theory of Rational Expectations,
and the Efficient Market Hypothesis……………………………………………………….141
PART 3 Financial Institutions 161
8 An Economic Analysis of Financial Structure…………………………………………. 162
9 Financial Crises …………………………………………………………………………………..185
10 Banking and the Management of Financial Institutions ……………………………213
11 Economic Analysis of Financial Regulation …………………………………………….242
12 Banking Industry: Structure and Competition………………………………………… 269
PART 4 Central Banking and the Conduct of Monetary Policy 301
13 Central Banks and the Federal Reserve System ………………………………………..302
14 The Money Supply Process …………………………………………………………………..325
15 The Tools of Monetary Policy……………………………………………………………….. 355
16 The Conduct of Monetary Policy: Strategy and Tactics …………………………… 380
PART 5 International Finance and Monetary Policy 421
17 The Foreign Exchange Market ………………………………………………………………422
18 The International Financial System ………………………………………………………. 446
PART 6 Monetary Theory 479
19 Quantity Theory, Inflation, and the Demand for Money…………………………….480
20 The IS Curve ……………………………………………………………………………………….497
21 The Monetary Policy and Aggregate Demand Curves………………………………..515
22 Aggregate Demand and Supply Analysis………………………………………………….528
23 Monetary Policy Theory………………………………………………………………………..570
24 The Role of Expectations in Monetary Policy …………………………………………..589
25 Transmission Mechanisms of Monetary Policy …………………………………………60