The economics of money, banking and financial markets 10th global edition

GLOBAL EDITION The tenth edition of The Economics of Money, Banking, and Financial Markets continues to set the standard for money and banking courses By applying a unified analytical framework to the models, Mishkin makes theory intuitive for students The Global Edition’s rich array of current and relevant real-world examples not only keeps students motivated, but provides a comprehensive discussion of monetary theory and monetary policy This Global Edition has been edited to include enhancements making it more relevant to students outside the United States The editorial team at Pearson has worked closely with educators around the globe to include: — Updated! Chapter on Financial Crises in Advanced Economies includes discussion on the shadow banking systems, Ireland and the financial crisis, and whether the Federal Reserve was to blame for the housing bubble — New! Chapter on Financial Crises in Emerging Markets The Economics of Money, Banking, and Financial Markets Pearson International Edition — Updated! Global discussion on central banks and their role in emerging and transition economies — MyEconLab! Helps students practice problems and improve their understanding of key concepts GLOBAL EDITION Mishkin GLOBAL EDITION This is a special edition of an established title widely used by colleges and universities throughout the world Pearson published this exclusive edition for the benefit of students outside the United States and Canada If you purchased this book within the United States or Canada you should be aware that it has been imported without the approval of the Publisher or the Author Tenth Edition The Economics of Money, Banking, and Financial Markets Tenth Edition Frederic S Mishkin Applying Theory To The reAl World: ApplicATions And Boxes Applications Simple Present Value, p 110 How Much Is That Jackpot Worth?, p 110 Yield to Maturity on a Simple Loan, p 112 Yield to Maturity and the Yearly Payment on a Fixed-Payment Loan, p 114 Yield to Maturity and the Bond Price for a Coupon Bond, p 115 Perpetuity, p 117 Calculating Real Interest Rates, p 124 Changes in the Interest Rate Due to Expected Inflation: The Fisher Effect, p 142 Changes in the Interest Rate Due to a Business Cycle Expansion, p 143 Explaining Low Japanese Interest Rates, p 145 Changes in the Equilibrium Interest Rate Due to Changes in Income, the Price Level, or the Money Supply, p 149 Money and Interest Rates, p 152 The Global Financial Crisis and the Baa-Treasury Spread, p 164 Effects of the Bush Tax Cut and Its Possible Repeal on Bond Interest Rates, p 167 Interpreting Yield Curves, 1980–2011, p 178 Monetary Policy and Stock Prices, p 187 The Global Financial Crisis and the Stock Market, p 188 Practical Guide to Investing in the Stock Market p 194 What Do Stock Market Crashes Tell Us About the Efficient Market Hypothesis and the Efficiency of Financial Markets?, p 198 Financial Development and Economic Growth, p 221 Is China a Counterexample to the Importance of Financial Development?, p 222 The Mother of All Financial Crises: The Great Depression, p 231 The Global Financial Crisis of 2007–2009, p 234 Crisis in South Korea, 1997–1998, p 251 The Argentine Financial Crisis, 2001–2002, p 257 Strategies for Managing Bank Capital, p 279 How a Capital Crunch Caused a Credit Crunch During the Global Financial Crisis, p 280 Strategies for Managing Interest-Rate Risk, p 287 The Great Depression Bank Panics, 1930–1933, and the Money Supply, p 400 The 2007–2009 Financial Crisis and the Money Supply, p 402 How the Federal Reserve’s Operating Procedures Limit Fluctuations in the Federal Funds Rate, p 416 Effects of Changes in Interest Rates on the Equilibrium Exchange Rate, p 490 Why Are Exchange Rates So Volatile?, p 491 The Dollar and Interest Rates, p 492 The Global Financial Crisis and the Dollar, p 493 How Did China Accumulate over $3 Trillion of International Reserves?, p 511 The Foreign Exchange Crisis of September 1992, p 514 Recent Foreign Exchange Crises in Emerging Market Countries: Mexico 1994, East Asia 1997, Brazil 1999, and Argentina 2002, p 516 Testing the Quantity Theory of Money, p 538 The Zimbabwean Hyperinflation, p 542 The Vietnam War Buildup, 1964–1969, p 560 The Fiscal Stimulus Package of 2009, p 562 Autonomous Monetary Easing at the Onset of the 2007–2009 Financial Crisis, p 572 The Volcker Disinflation, 1980–1986, p 599 Negative Demand Shocks, 2001–2004, p 599 Negative Supply Shocks, 1973–1975 and 1978–1980, p 602 Positive Supply Shocks, 1995–1999, p 606 Negative Supply and Demand Shocks and the 2007–2009 Financial Crisis, p 608 The United Kingdom and the 2007–2009 Financial Crisis, p 610 China and the 2007–2009 Financial Crisis, p 611 Quantitative (Credit) Easing to in Response to the Global Financial Crisis, p 627 The Great Inflation, p 638 The Term Structure of Interest Rates, p 644 A Tale of Three Oil Price Shocks, p 653 Credibility and the Reagan Budget Deficits, p 657 The Great Recession, p 671 Applying the Monetary Policy Lessons to Japan, p 673 Following the Financial News Boxes Money Market Rates, p 73 Capital Market Interest Rates, p 75 Foreign Stock Market Indexes, p 79 The Monetary Aggregates, p 102 Yield Curves, p 168 When an Advanced Economy Is like an Emerging Market Economy: The Icelandic Financial Crisis of 2008, p 262 Applying Theory to the Real World: Applications and Boxes Foreign Exchange Rates, p 478 Aggregate Output, Unemployment, and Inflation, p 583 Global Boxes Are U.S Capital Markets Losing Their Edge?, p 77 The Importance of Financial Intermediaries Relative to Securities Markets: An International Comparison, p 80 Negative T-Bill Rates? It Can Happen, p 119 Ireland and the 2007–2009 Financial Crisis, p 240 Worldwide Government Bailouts During the 2007–2009 Financial Crisis, p 242 Barings, Daiwa, Sumitomo, and Société Générale: Rogue Traders and the Principal–Agent Problem, p 289 The Spread of Government Deposit Insurance Throughout the World: Is This a Good Thing?, p 296 Where Is the Basel Accord Heading After the Global Financial Crisis?, p 301 International Financial Regulation, p 308 Comparison of Banking Structure in the United States and Abroad, p 341 Ironic Birth of the Eurodollar Market, p 347 Islamic Finance: Alternative Ethical Solutions to Financial Stability, p 373 Why the Large U.S Current Account Deficit Worries Economists, p 505 The Euro’s Challenge to the Dollar, p 508 The Global Financial Crisis and the IMF, p 521 Argentina’s Currency Board, p 528 The Demise of Monetary Targeting in Switzerland, p 648 Ending the Bolivian Hyperinflation: A Successful Anti-Inflation Program, p 656 Inside the Fed Boxes Was the Fed to Blame for the Housing Price Bubble?, p 237 The FOMC Meeting, p 359 How Bernanke’s Style Differs from Greenspan’s, p 362 Why Does the Fed Need to Pay Interest on Reserves?, p 411 A Day at the Trading Desk, p 419 Using Discount Policy to Prevent a Financial Panic, p 422 Fed Lending Facilities During the Global Financial Crisis, p 427 Chairman Bernanke and Inflation Targeting, p 448 The Fed’s Use of the Taylor Rule, p 460 Fed Watchers, p 460 Bank Panics of 1930–1933: Why Did the Fed Let Them Happen?, p 467 A Day at the Federal Reserve Bank of New York’s Foreign Exchange Desk, p 501 The Appointment of Paul Volcker, Anti-Inflation Hawk, p 658 FYI Boxes Are We Headed for a Cashless Society?, p 100 Where Are All the U.S Dollars?, p 102 With TIPS, Real Interest Rates Have Become Observable in the United States, p 126 Conflicts of Interest at Credit-Rating Agencies and the Global Financial Crisis, p 164 The Yield Curve as a Forecasting Tool for Inflation and the Business Cycle, p 178 Should You Hire an Ape as Your Investment Adviser?, p 196 The Enron Implosion, p 212 Should We Kill All the Lawyers?, 222 Collateralized Debt Obligations (CDOs), p 235 Mark-to-Market Accounting and the Global Financial Crisis, p 305 The Subprime Mortgage Crisis and Consumer Protection Regulation, p 306 Will “Clicks” Dominate “Bricks” in the Banking Industry?, p 328 Bruce Bent and the Money Market Mutual Fund Panic of 2008, p 331 The Global Financial Crisis and the Demise of Large, Free-Standing Investment Banks, p 344 Meaning of the Word Investment, p 553 Deriving the Aggregate Demand Curve Algebraically, p 574 The Phillips Curve Tradeoff and Macroeconomic Policy in the 1960s, p 618 The Activist/Nonactivist Debate over the Obama Fiscal Stimulus Package, p 634 The Political Business Cycle and Richard Nixon, p 647 Consumers’ Balance Sheets and the Great Depression, p 670 The ecoNomIcs oF moNeY, BANkING, ANd FINANcIAl mArkeTs Glo BA l e d I T I o N Te n t h e d i t i o n Frederic s Mishkin columbia University Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Editorial Director: Sally Yagan Editor in Chief: Donna Battista Acquisitions Editor: Noel Kamm Seibert Senior International Acquisitions Editor: Laura Dent International Print and Media Editor: Leandra Paoli Editorial Project Manager: Carolyn Terbush Editorial Assistant: Emily Brodeur VP/Director of Marketing: Patrice Jones Director of Marketing: Maggie Moylan Executive Marketing Manager: Lori DeShazo International Marketing Manager: Dean Erasmus Marketing Assistant: Kim Lovato Senior Managing Editor: Nancy H Fenton Senior Production Project Manager: Kathryn Dinovo Permissions Project Supervisor: Michael Joyce Senior Manufacturing Buyer: Carol Melville Cover Designer: Jodi Notowitz Text Designer: Cenveo Publisher Services/Nesbitt Graphics, 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Organization: Theory and Practice Murray Econometrics: A Modern Introduction Weil Economic Growth Nafziger The Economics of Developing Countries Williamson Macroeconomics Visit www.myeconlab.com to learn more Brief contents PArT inTrodUcTion 43 Why Study Money, Banking, and Financial Markets? 44 An Overview of the Financial System 67 What Is Money? 94 PArT FinAnciAl MArkeTs PArT 203 An Economic Analysis of Financial Structure 204 Financial Crises in Advanced Economies 227 Financial Crises in Emerging Market Economies 245 Banking and the Management of Financial Institutions 265 Economic Analysis of Financial Regulation 294 Banking Industry: Structure and Competition 321 cenTrAl BAnking And The condUcT oF MoneTAry policy 14 15 16 17 PArT Understanding Interest Rates 108 The Behavior of Interest Rates 130 The Risk and Term Structure of Interest Rates 160 The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis 183 FinAnciAl insTiTUTions 10 11 12 13 PArT 107 353 Central Banks: A Global Perspective 354 The Money Supply Process 379 The Tools of Monetary Policy 409 The Conduct of Monetary Policy: Strategy and Tactics 434 inTernATionAl FinAnce And MoneTAry policy 475 18 The Foreign Exchange Market 476 19 The International Financial System 500 PArT MoneTAry Theory 20 21 22 23 24 25 26 533 Quantity Theory, Inflation, and the Demand for Money 534 The IS Curve 551 The Monetary Policy and Aggregate Demand Curves 569 Aggregate Demand and Supply Analysis 582 Monetary Policy Theory 624 The Role of Expectations in Monetary Policy 643 Transmission Mechanisms of Monetary Policy 662 contents PArT inTrodUcTion 43 chAPTer Why study Money, Banking, and Financial Markets? 44 Why Study Financial Markets? 44 The Bond Market and Interest Rates 44 The Stock Market 46 Why Study Financial Institutions and Banking? 46 Structure of the Financial System 47 Financial Crises 48 Banks and Other Financial Institutions 48 Financial Innovation 48 Why Study Money and Monetary Policy? 49 Money and Business Cycles 49 Money and Inflation 49 Money and Interest Rates 52 Conduct of Monetary Policy 52 Fiscal Policy and Monetary Policy 53 Why Study International Finance? 54 The Foreign Exchange Market 54 The International Financial System 56 How We Will Study Money, Banking, and Financial Markets 56 Exploring the Web 57 Collecting and Graphing Data 57 Web Exercises 57 Concluding Remarks 58 Summary  59   •   Key Terms  60   •   Questions  61   •   Applied Problems  62   •   Web Exercises  62   •   Web References  63 APPeNdIx To c h A P T e r defining Aggregate output, income, the price level, and the inflation rate 64 Aggregate Output and Income 64 Real Versus Nominal Magnitudes 64 Aggregate Price Level 65 Growth Rates and the Inflation Rate 66 chAPTer An overview of the Financial system 67 Function of Financial Markets 67 Structure of Financial Markets 69 Debt and Equity Markets 69 Primary and Secondary Markets 70 716 Index Monetary base (MB), 380–387, 396–398 control by Federal Reserve, 387 defined, 380 discount loans and, 386 equation expressing, 381 money multiplier and, 396–399 money supply (M1) and, 403f, 404f nonborrowed, 394 open market operations and control of, 382–385 other factors affecting, 386–387 shifts from deposits into currency, 385–386 unsterilized foreign exchange intervention and, 503 n.1 A Monetary History of the United States (1867–1960) (Friedman & Schwartz), 400, 646 Monetary liabilities, Federal Reserve, 380–381 Monetary policy See also Central banks activist vs nonactivist rules, 646 adoption of rules, 645 advantages and disadvantages compared, 424–425 aggregate demand and, link between See Monetary transmission mechanisms argument for rules, 646–647 asset-price bubbles and, 451, 453–454 asset purchases, 426 autonomous tightening of, 571, 576, 578f, 579 central banks and, 354 central banks’ conduct of, implications for, 671–673 commitment to future actions, 428–429 conduct of, 52–53 conducting, rules vs discretion, 645–649 constant-money-growth-rate rules, 646, 648 conventional tools, 418–425, 672 credibility in, 649–657 See also Credibility de-emphasizing federal funds rate (1979–1982), 470–471 de-emphasizing monetary aggregates (1982-early 1990s), 471–472 defined, 52 discount loans policy, 420–423, 465–466 See also Discount loans; Discount rates discount window operation, 420–421 discretion vs., 645–649 easing of See Easing of monetary policy economic downturns, preemptive strikes against, 473 economic revival, 672 effects of, lags in, 445 effects on federal funds rate, 412–416 of European Central Bank, 429–431 evaluation models, Lucas critique of, 643–644 expansionary, politicians and, 647, 647b federal funds rate and market for reserves, 409–417 Federal Reserve and, 379, 409, 569–570 and fiscal policy, 53 FOMC actions during Global Financial Crisis, 569 FOMC decisions on, 358–360 Global Financial Crisis, 425–429, 447–454 goals of, 435–439 in Great Depression, 466–468 historical perspective on, 465–474 inflation, preemptive strikes against, 472 inflation targeting as, 439–444 interest on reserves, 424 international considerations, 473–474 in Japanese economy, 673–674 “just it” approach in, 446–447 lender-of-last-resort operations, 421–423 liquidity provision, 425–426 mandates in, 438–439 money supply and See Money supply nominal anchor in, 435, 445–447 nominal interest rates and, 569–570 nonconventional tools, 425–429, 672 open markets operations as, 412–414, 413f, 418–420, 466 See also Open market operations pegging interest rates (1942– 1951), 468 preemptive strikes, 472, 473 price stability as goal of, 435– 437, 439 procyclical, 468–469 rational expectations and See Rational expectations theory reserve requirements, 423, 467–468 rigidity of rules, 647 rules for conducting, 645–649 strategy, 447–454 tactics, 454–460 targeting federal funds (early 1990s and beyond), 472 targeting monetary aggregates (1970s), 469–470 targeting money market conditions (1950s and 1960s), 468–469 theory of bureaucratic behavior and, 364–365, 365 n.3 tightening of, 358, 571, 576, 578f, 579 time-inconsistency problem in, 435–436 tools, 409–431 transmission mechanisms See Monetary transmission mechanisms Web references, 433, 464, 661 Monetary policy (MP) curve, 570, 571f aggregate demand curve shift from, 576, 578f, 579 Index algebraically deriving AD curve from, 574b deriving AD curve from, 574, 574b, 575f graphically deriving AD curve from, 573–574, 575f shifts in, 571–572, 572f, 576, 578f, 579 Taylor principle and, 570–571 use with IS curve, 569 Monetary Policy Report to the Congress, 360 Monetary policy theory, 624–640 aggregate demand shocks, 625–627, 626f implementation, 632–633 inflation and, 624–625, 633–640 inflationary, causes of, 634–640 lags, 632–633 permanent supply shock, response to, 627–628, 629f, 633t shocks, response to, 624–632 stabilization of economic activity and inflation, 626–633 temporary aggregate supply shock, response to, 629–631, 630f, 631f Monetary targeting, in Switzerland, 648b Monetary theory, 533–674 aggregate demand and supply analysis, 582–613 budget deficits and inflation, 540–542 defined, 49, 534 Global Financial Crisis of 2007– 2009, 533 monetary policy theory, 624–640 quantity theory of, 534–538 velocity of money See Velocity of money Monetary transmission mechanisms, 662–674 credit view, 664, 665f, 667–670 defined, 662 in Global Financial Crisis (2007–2009), 671 interest-rate channels, 663–664 in Japanese economy, 673–674 monetary policy and, 671–673 other asset price channels, 664–667, 665f traditional components, 663–664 Web references, 676 Monetizing the debt, 541 Money, 94–104 See also Monetary theory; Money aggregates; Money supply and business cycles, 49 checks as, 98–99 commodity money, 98 control of, central bank behavior and, 365 n.3 defined, 49 demand for See Demand for money e-cash, 100 e-money, 99–100 electronic money, 99–100 electronic payment, 99–100 fiat money, 98 functions of, 95–97 and inflation, 49–52 and interest rates, 52 liquidity, 97 market See Market for money; Money market meaning of, 94–95 measurement of, 100–104, 101t as medium of exchange, 95–96 and monetary policy, 49–54 payments system, evolution of, 98–100 smart cards, 99 as store of value, 97 as unit of account, 96–97 Web references, 106 Money aggregates, 101–104, 101t See also M1 monetary aggregate; M2 monetary aggregate defined, 101 measures of, 101t Money center banks, 276 Money demand See Demand for money Money growth average inflation rate compared, 52f 717 and business cycle, 50f inflation and, 539f, 540f interest rates and, 53f, 156f Money market conditions, targeting, 468–469 Money market deposit accounts (MMDAs), 101t, 102 Money Market Investor Funding Facility (MMIFF), 427b Money market mutual funds, 342 development of, 329 as financial innovation, 330–331 as monetary aggregate component, 101t, 102 panic of 2008, 331 primary assets and liabilities of, 84t value of assets, 85t Money markets, 71–72 defined, 71 instruments of, 72–74, 72t See also Certificates of deposit (CDs); Commercial paper; Federal funds; Repurchase agreements; U.S Treasury Bills rates, 73b Money multiplier (m), 396–399 deriving, 396–397 excess reserves ratio and, 398 n.9 intuition behind, 398 Money supply, 379–405 See also Money aggregate price level and, 51f control of monetary base and, 381–387 effects of foreign exchange market on, 521–522 exchange rate volatility and, 492 factors determining, 394–395 Federal Reserve’s balance sheet and, 379–381 financial crisis (2007–2009) and, 402–405 foreign exchange interventions and, 500–503 during Great Depression bank panics, 400–402 liquidity preference framework, 150t, 151–153, 151f, 152f 718 Index Money supply (continued) monetary base and (1929– 1933), 403f money multiplier and, 396–399 multiple deposit creation, simple model of, 388–394 overview of money supply process, 395–396 participants in money supply process, 379 process, 379, 395–396 rate of growth and interest rates, 153–156, 155f, 156f response to changes, 399 Web references, 408 Monitoring See also Information banks and credit risk management, 281–282 and principal–agent problem, 216 restrictive covenants, 218–219 Moral hazard, 82–83 Argentine financial crisis (2001– 2002), 257 and choice between debt and equity contracts, 214–217 and debt contracts, 214–217, 218–220 defined, 82, 214 financial crises and, 248, 254, 257 financial institutions and, 208– 209, 214–220 government safety net and, 297 for lenders of last resort, 519 low bank capital and, 300 principal–agent problem, 215–217 solutions, 220t South Korean financial crisis (1997–1998), 254 too-big-to-fail policy and, 298 worldwide banking crises and, 313 Morgan Stanley, 323, 344b Mortgage-backed securities as capital market instrument, 75 defined, 75 and Global Financial Crisis of 2007–2009, 234 subprime crisis (2007–2008), 671 Mortgages adjustable-rate, 325 as capital market instrument, 74t, 75 defined, 75 interest rates discussed in the media, 75b Movements along supply or demand curve, 136 MP curve See Monetary policy (MP) curve mpc (marginal propensity to consume), 553, 556 n.3 Multiple deposit creation, 388–394 banking system and, 389–392, 391t critique of model for, 393–394 defined, 388 formula for, 392 by single bank, 388–389 Municipal bonds as capital market instruments, 74t, 76 Muth, John See Rational expectations theory Mutual funds primary assets and liabilities of, 84t value of assets, 85t Mutual savings banks, 84, 345 primary assets and liabilities of, 84t shares, 84 value of assets, 85t NAIRU (nonaccelerating inflation rate of unemployment), 459 NASDAQ, 70 Composite index, 79b National Association of Securities Dealers Automated Quotation System See NASDAQ National Bank Act of 1863, 323 National banks, 323 examining body, 302 Federal Reserve System and, 357 National Central Banks (NCBs), 365–370 National Credit Union Administration (NCUA), 88t, 345 National Credit Union Share Insurance Fund (NCUSIF), 89, 345 NationsBank, 340 Nationwide banking, 340, 341–342 Natural rate of output, 437, 587 Natural rate of unemployment, 436, 587 Negative aggregate demand shocks, 650, 651f Negative aggregate supply shocks, credibility and, 652–653, 652f Negative supply shocks, 603f, 604–606, 608 Negotiable bank certificates of deposit See Certificates of deposit (CDs) Net export function, 556 Net exports, 555–556, 582, 585t, 586 in aggregate demand, 552 autonomous, 556, 564, 565t exchange rate effects on, 664 real interest rates and, 555 Net stable funding ratio (NSFR), 309 Net worth definitions, 214 “lemons problem” and, 214 and moral hazard in debt contracts, 218 Netherlands, government bailout in, 242b New York Stock Exchange (NYSE), 70 New Zealand, inflation targeting in, 440, 441f NINJA loan, 306b Nippon Ginko See Bank of Japan Nixon, Richard, political business cycle and, 647b No-doc loan, 306b Nominal anchor credible, benefits of, 649–650 implicit, U.S monetary policy with, 445–447 pegging exchange rate to, 657– 658 See also Exchange-rate targeting price stability and, 435 Index Nominal GDP, 64 Nominal interest rates, 125f behavior of See Interest rates, behavior of cash flow transmission mechanism and, 668 defined, 123 interest-rate transmission mechanism and, 663 monetary policy and, 569–570, 671 real interest rates distinguished, 123–124 Taylor principle and, 570–571 value of U.S dollar and, 492– 493, 493f Nonaccelerating inflation rate of unemployment (NAIRU), 459 Nonactivists, 634b and monetary policy theory, 632 rules, for conducting monetary policy, 646 Nonbank public, open market purchase from, 382–384 Nonborrowed monetary base (MBn), 387, 394, 395t Nonborrowed reserves, targeting on, 455–456, 455f, 470–471 Nonconventional monetary policy tools in economic revival, 672 during Global Financial Crisis, 425–429 Nontransaction deposits and bank balance sheet, 266f, 267 NOW accounts, required reserves, 423, 423 n.6 NYSE See New York Stock Exchange Obama, Barack, administration of, 562 Obama Fiscal Stimulus Package, 562–563, 634b Observability, policy instrument criterion, 457 Off-balance-sheet activities, 287– 290, 299–300, 334 defined, 287 Office of the Comptroller of the Currency, 88–89, 88t, 302, 303, 323, 357 Office of Thrift Supervision (OTS), 88t, 345 Official dollarization, 376 n.5 Official reserve transactions balance, 505 Offshore deposits, 347, 347 n.2 Oil prices in 1990s, 662 negative supply shocks (1973, 1979, 2007), 653 Okun, Arthur, 622 See also Okun’s law Okun’s law, 622–623, 622f, 622 n.7 On-site examinations, financial institutions, 302 One-period valuation model, 184–185 Open market operations, 357, 382–385, 418–420 advantages of, 424 defensive, 418 defined, 382 dynamic, 418 effects on federal funds rate, 412–414, 413f of European Central Bank, 430 in 1920s, 466 purchase from bank, 382 purchase from the nonbank public, 382–384 sale, 384–385 trading desk management, 419b Open market purchase, 382 Open market sale, 382, 384–385 Operating instrument See Policy instrument, choosing Opportunity cost, 147 “The Optimal Degree of Commitment to an Intermediary Monetary Target” (Rogoff), 658 n.6 Optimal forecast, 189 Organization for Economic Cooperation and Development (OECD), 300 Organized exchanges See Exchanges and exchange markets 719 Originate-to-distribute model and Global Financial Crisis of 2007–2009, 234–235 Output fluctuations in, inflation targeting and, 444 natural rate of, 437, 587 potential, 437, 587 Output gap, 458–459, 588–589, 591t, 592–594, 593f, 622, 622 n.7 Output stability financial stability and, 449 as monetary policy goal, 436–437 Over-the-counter (OTC) markets, 71 foreign exchange market organized as, 479 Overnight cash rate, 429–430 Overregulation, danger of, 318 Overvaluing of currency, 509 Par value See Face value Paul, Ron, 360 Payment technology, 543 Payments system defined, 98 evolution of, 98–100 Payoff method, FDIC, 295 PCE (personal consumption expenditures) deflator, 65, 583b Pension funds, 86 and capital market instruments, 72 primary assets and liabilities of, 84t value of assets, 85t People’s Bank of China, 374–375, 378 “Perfect storm,” Global Financial Crisis of 2007–2009 as, 533 Permanent supply shocks, 604–606, 605f, 606 n.5 monetary policy theory, response to, 627–628, 628f, 629f Perpetuity bonds See Consol bonds Persistent output gap, 592–594, 593f 720 Index Personal consumption expenditures (PCE) deflator, 65, 583b Phelps, Edmund, 617–620 Philippines, speculative attacks and, 516 Phillips, A W., 616 See also Phillips curve Phillips curve, 458–459, 616–621 See also Short-run aggregate supply curve 1950–1969, 618f 1960s, 616, 617b 1970–2010, 618f adaptive expectations, 620–621 after 1960s, 620 Friedman-Phelps analysis, 617–620 long-run, 619f modern, 620–621 rational expectations, 621 n.5 short-run, 619f Physical capital, bank balance sheet, 266f Pigou, A C., 536 n.2 Planned expenditure, and aggregate demand, 551–552 Planned investment spending, 582 in aggregate demand, 552 business expectations and, 554 real interest rates and, 554 types of, 553–554 Plaza Agreement (1987), 523 Policy, monetary See Monetary policy Policy instrument, choosing, 454–456 criteria for, 456–457 Policy Targets Agreement, 440 Policy trilemma, 510, 511f Political business cycle, 361, 647 and Richard Nixon, 647b Portfolio balance effect, 504 n.2 Portfolio choice theory, 132, 544–545 Portfolio of assets, 81 Portfolio theory, 130 money demand, 544–545 Positive aggregate demand shocks, 650, 651f Positive supply shocks, 606, 607f Potential output, 437, 587 Pound, British exchange rate on (1990–2011), 477f foreign exchange crisis (1992) and, 514–515, 514f PPP See Theory of purchasing power parity (PPP) Precautionary motive, money demand, 543 Predictability, policy instrument criterion, 457 Preferred habitat theory, 174–176 compared with expectations theory, 175f defined, 174–176 Prescott, Edward, 643 n.2 Present discounted value See Present value Present value, 108–111 definitions, 108–109 President, U.S., Federal Reserve System and, 361 Price level See also Aggregate price level unanticipated, as monetary transmission mechanism, 669, 672–673 Price level changes, liquidity preference framework, 150t, 151, 151f Price-level effect, 149, 150t, 153 Price shocks, 589, 591t, 592, 592f Price stability exchange-rate targeting and, 523 financial stability and, 449 mandates for, 438–439 as monetary policy goal, 434– 437, 439 monetary transmission mechanisms and, 672–673 nominal anchor role in, 435 time-inconsistency problem in, 435–436 Price stickiness, 589 Prices, 96–97 Primary credit, 420, 420 n.4 Primary Dealer Credit Facility (PDCF), 427b Primary dealers, open market operations, 418 Primary markets, 70–71 See also Investment banks Prime rates, 73b Principal, 109 Principal–agent problem, 289b equity contracts, 215–217, 217 n.3 and Global Financial Crisis of 2007–2009, 234–235 solutions, 220t Printing money, 541 Private production, “lemons problem” and, 210–211 Procyclical monetary policy, 468–469 Producer price index (PPI), 583b Productivity, foreign exchange rates and, 482–483 Profits decline in, banks’ responses to, 334–335 financial innovation and, 324 Protectionism, 523 Prudential supervision See Financial (prudential) supervision Public Company Accounting Oversight Board (PCAOB), 304 Public interest view, bureaucratic behavior, 364 Purchase and assumption method, FDIC, 295–296 Purchases, government, 582, 584, 585t Purchasing Power of Money (Fisher), 534–535 Purchasing power parity (PPP) theory of, 480–481 United States/United Kingdom (1973–2011), 481f QE2 (Quantitative Easing 2), 426 Quantitative easing, 426, 428 Quantitative Easing (QE2), 426 Quantity theory of money, 534–538 defined, 536 demand for money, 536 Index equation of exchange, 534–536 and inflation, 537–538 price level and, 537 velocity of money and, 534–536 Quotas, 482 Rate of capital gain, 120 Rate of inflation See Inflation rate Rate of return See Returns Ratings, bonds, 162–165, 163t Rational expectations theory, 188– 198, 621 n.5, 645 See also Efficient market hypothesis defined, 189 formal statement of, 190 implications of, 191 monetary policy and, 643–644 rationale behind, 190–191 revolution, in monetary policy, 643–644 Reagan, Ronald, administration of, 657 Real bills doctrine, 465 Real business cycle theory, 604–606 Real estate loans bank balance sheet, 266f commercial, 334 Real exchange rate, 480 Real GDP, 65 Real interest rates, 125f and aggregate output relationship See IS curve calculating, 124 defined, 123 easing of monetary policy and, 663 federal funds rate and, 569–570 interest-rate transmission mechanism and, 663 long-term vs short-term, 663, 672 nominal interest rates distinguished, 123–124 planned investment spending and, 554 Taylor principle and, 570–571 Real money balances, 536 Real terms, defined, 124 Recessions of 1980, 662 of 1981–1982, 662 of 2007–2009 See Global Financial Crisis of 2007–2009 defined, 49 global See Global Financial Crisis of 2007–2009 subprime mortgage crisis and See Subprime mortgage crisis (2007–2008) Recognition lag, 633 Recovery Argentine financial crisis (2001– 2002), 260–261 South Korean financial crisis (1997–1998), 256 Rediscounting, 465 Redlining, 306 Refinancing operations, 430 Regulation See Financial regulation; specific topics and legislation Regulation B, 305 Regulation K, 348 Regulation Q, 89, 330, 333 Regulation Z, 305, 306b Regulatory arbitrage, 300 Reinhart, Carmen, 447 Reinhart, Vincent, 447 Reinvestment risk, 122 n.5 Relative price levels, foreign exchange rates and, 482 Repos See Repurchase agreements Repurchase agreements, 418, 420 defined, 73–74 Global Financial Crisis of 2007– 2009, 238 Required reserve ratio (rr), 381, 394, 395t defined, 268 money multiplier and, 399 n.10 Required reserves, 381 as bank asset, 268 demand curve for reserves and, 410 Reserve Bank of Africa, 374 Reserve Bank of New Zealand Act of 1989, 440 Reserve currency, 507 Reserve Primary Fund, 331b 721 Reserve requirements, 268 See also Required reserve ratio (rr) on checkable deposits, 423, 423 n.6 European Central Bank and, 430 federal funds rate and, 415, 415f as Federal Reserve policy tool, in 1930s, 467–468 financial innovation and, 330 Reserves and bank balance sheet, 266f, 268 banks, 268–269 effects of federal funds rate, 415–416, 415f, 416f international, 500, 506, 511–512 liquidity management and, 272–275 open market operations and, 382–385 supply and demand in market for, 415–416, 415f, 416f t-accounts and, 269–272 Residential housing prices and Global Financial Crisis of 2007–2009, 236, 236f Residential mortgages See Mortgages Residual claimants, 70, 183 Resolution authority under DoddFrank bill, 316 Restrictive covenants banks and credit risk management, 282 defined, 207 monitoring and enforcement of, 218–219 Return on assets (ROA), 278 Return on equity (ROE), 278 Returns coupon-rate bonds, 121t definitions, 119 distinguished from interest rates, 119–123, 121t expected, domestic and foreign assets compared, 497–499 Revaluation of currency, 510 Reverse repo, 420 Reverse transactions, 430 722 Index Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, 298, 311t, 340 Rigidity inflation targeting and, 443–444 of rules for conducting monetary policy, 647 Risk See also Credit risk; Interestrate risk banks and banking, 281–290 defined, 80–81, 131 as determinant of asset demand, 131–132, 132t inflation hedges, 545 interest rates, 122–123 and money demand, 545 shifts in demand for bonds, 138t, 139 systemic regulation, under Dodd-Frank bill, 316 Risk aversion, 131 Risk management, assessment of, 303–304 Risk premium, 161 Risk sharing and indirect finance, 80–81 Risk structure of interest rates, 160–168 Risky assets, 299 Rogoff, Kenneth, 658, 658 n.6 Rohatyn, Felix, 422b Roosevelt, Franklin Delano, 466 Rs (supply curve of reserves), 411 S & P 500 See Standard and Poor’s (S&P) 500 index Samuelson, Paul, 450 Sarbanes-Oxley Act of 2002, 304, 311t Sargent, Thomas, 643, 657 Savings accounts, 94 Savings and loan associations (S&Ls), 84, 311–313, 344–345 bailout of (1989), 313 primary assets and liabilities of, 84t shares, 84 value of assets, 85t Savings deposits defined, 84 as monetary aggregate component, 101t, 102 Schwartz, Anna Jacobson, 646 n.4 on Great Depression bank panics, 400, 466, 467b Seasonal credit, 420–421, 420 n.4 Second Bank of the United States, 322 Secondary credit, 420, 420 n.4 Secondary loan participation See Loan sales Secondary markets, 70–71 See also Foreign exchange market; NASDAQ; New York Stock Exchange Secondary reserves, 268 Secured debt, 206 Securities See also Bonds; Investment banks; Underwriting securities as bank assets, 268–269 bank balance sheet, 266f behavioral finance, 198–199 defined, 44 and importance as source of external funding, 205–206, 205f liquidity of, 71 mortgage-backed See Mortgagebacked securities Securities Act of 1933, 87, 304, 310t Securities and Exchange Commission (SEC), 87, 88t, 304 Securities brokers and dealers, 70 Securities Exchange Act of 1934, 310t Securities markets, access to, 206 Securitization, 329, 334 defined, 234 Security First Network Bank, 327 Segmented markets theory, 173–174 Self-correcting mechanism, 597 Shadow banking system, 238, 324 See also Financial innovation Shares See Credit unions; Mutual savings banks; Savings and loan associations (S&Ls); Stocks Shell operations, 348 Shifts in supply or demand curve, 136 Shocks, 589 See also Demand shocks; Supply shocks aggregate demand, 597–599 aggregate supply, 601–604 monetary policy theory, response to, 624–632 Short-run aggregate supply curve, 621–623, 622 n.7 deriving, 623, 623 n.8 shifts in, 591–594, 591t, 592f, 593f Short-run equilibrium, 594–597, 595f Short-run exchange rates, 483–484 demand curve for domestic assets, 485 equilibrium in foreign exchange market, 485 expected returns on domestic and foreign assets, 497–499 interest parity condition and, 499 supply curve for domestic assets, 484 Short sales, 199 Short-term debt instruments, 70 See also Commercial paper; Money markets; Repurchase agreements Short-term interest rates, expectations theory and, 172 n.3 Short-Term Liquidity Facility, 521b Simple deposits multiplier, 391 Simple interest rate, 109, 113 Simple loans, 109, 112 yield to maturity, 112–113 Simplified balance sheet, Federal Reserve System, 379–380 Small-denomination time deposits and bank balance sheet, 266f as monetary aggregate component, 101t, 102 Smart cards, 99 Société Générale, 289b Solow, Robert, 450 Soros, George, 515 Sound currency, 524 South America, central banks in, 375 Index South Korea financial crisis See South Korean financial crisis (1997–1998) government bailout in, 242b speculative attacks and, 516 South Korean financial crisis (1997–1998), 251–256 Chaebols, 252–253 inflation, 251f real GDP growth, 252f recovery, 256 unemployment, 252f Spain, government bailout in, 242b Special drawing rights (SDRs), 513 Speculative attacks on currency, 514, 515 defined, 249 in emerging market countries (1994–2002), 516–517 Speculative motive, money demand, 543 Spending autonomous, IS curve shifts and, 563–564, 565t government See Government purchases investment See Investment spending types of, aggregate demand and, 552 Spot exchange rate, 477 Spot transactions, 477 Stagflation, 603, 603f Standard and Poor’s (S&P) 500 index, 79b Standing lending facility, 420 State banking and insurance commissions, 88t restrictions on entry of financial intermediary, 88t State banks, 323, 357 examining bodies, 302 State-owned banks, 222 Sterilized foreign exchange intervention, 503 portfolio balance effect and, 504 n.2 Stickiness, price, 589 Sticky prices, 570, 663 Stimulus packages under Bush administration, 242 under Obama administration, 242, 634b Stock exchange See Stock market Stock market, 46, 183–188 See also Over-the-counter (OTC) markets; Stock prices adverse selection, 210 bubbles, 197 computing price of common stock, 183–186 crashes, 197–198, 231–232, 232f See also Stock market declines and crashes Great Depression, 231–233, 232f “lemons problem,” 210 Practical guide to investing in the stock market, 194–197 setting prices, 186–188 Web references, 202 Stock market declines and crashes See also Financial crises “Black Monday,” 422b Great Depression and See Great Depression South Korean financial crisis (1997–1998), 254, 254f terrorist attacks of September 11, 423b Stock prices, 186–188 Global Financial Crisis of 2007– 2009, 239f investment spending and, 666, 666 n.2 measured by Dow Jones Industrial Average, 47f reactions to announcements, 196 volatility of, 46 Stockholders, defined, 183 Stocks See also Convertible bonds; Dividends; Over-the-counter (OTC) markets; Securities; Stock market as capital market instrument, 74t, 75 definitions, 46, 70, 75, 183 generalized dividend valuation model, 185–186 Global Financial Crisis and, 188 723 Gordon growth model, 185–186 and importance as source of external funding, 204–205, 205f, 205 n.1 investing in See Investment and investments monetary policy and stock prices, 187–188 one-period valuation model, 184–185 price, computing, 183–186 prices of See Stock prices residual claimants, 183 valuation, 184–185 Stocks of assets, 136 Store of value, money as, 97 Stored-value cards, 99 Strait Times Index, 79b Strauss-Kahn, Dominique, 521b Stress tests, 242 n.3, 304 Structural unemployment, 436, 617 n.4 Structured credit products, 234 Structured investment vehicles (SIVs) See Derivatives Subprime mortgage crisis (2007–2008) See also Global Financial Crisis of 2007–2009 consumer protection regulation and, 306b, 307 “lender of last resort” and, 297 monetary transmission mechanisms and, 671 Subprime mortgages, and Global Financial Crisis of 2007–2009, 234 Sumitomo Corporation, 289b Super-NOW accounts, required reserves on, 423, 423 n.6 Superregional banks, 339 Supervisory Capital Assessment Program (SCAP), 242 n.3 Supply See also Demand excess supply, 135 of money See Money supply shifts in supply of bonds, 140–146, 140t, 141f shifts in supply of money, 149, 150t shocks in See Supply shocks 724 Index Supply and demand analysis See also Aggregate demand and supply analysis bond market, 136 of fixed exchange rate regime, 508–511 foreign exchange rate, 483–485 in market for reserves, 409–411 movements along curve, 136 shifts in curve, 136 Supply conditions, financial innovation and, 326–329 Supply curve for domestic assets, 484 for money, 149, 150t of reserves (Rs), 411 Supply shocks, 589 Global Financial Crisis of 2007–2009 and, 238 n.2 negative supply and demand shocks and Global Financial Crisis, 608, 609f negative supply shocks, 603f, 604–606, 608 permanent, 604–606, 605f, 606 n.5, 627–628, 628f, 629f positive supply shocks, 606, 607f temporary aggregate supply shocks, 629–631, 630f, 631f temporary negative supply shock, 602f Supply side economic policy, economic growth and, 437 Surplus See Budget deficit or surplus Swap lines, 427b Sweden, government bailout in, 242b Sweep accounts, 331–332 Swiss Interbank Clearing (SIC), 648b Swiss National Bank, 648b Systemically important financial institutions (SIFIs), 316 T-accounts, 269–272 defined, 269 Federal Reserve System, 379–380 liquidity management in banks, 272–275 multiple deposit creation and, 388–392, 393 open market operations and, 382–385 Taiwan, speculative attacks and, 517 Target financing rate, 429 Tariffs, 482 TARP (Troubled Asset Relief Plan), 241 Taxes and tax considerations aggregate demand and, 556 aggregate demand curve and, 585t, 586 consumption function and, 552, 552 n.1 fiscal policy and control of government spending and See Fiscal policy international banks as tax havens, 348 IS curve shifts and, 561–562, 563f securities, buying and selling, 197 n.7 Taylor, John, 458, 570, 664, 664 n.1 Taylor principle, 458 autonomous easing contrasted with, 572 monetary policy curve and, 570–571 Taylor rule versus, 570 n.1 Taylor rule, 457–459, 646 for federal funds rate, 460b Taylor principle versus, 571 n.1 Temporary supply shocks, 602–604 monetary policy theory response to, 629–631, 630f, 631f “Tequila effect,” 516 Term Asset-Backed Securities Loan Facility (TALF), 427b Term Auction Facility (TAF), 425, 427b Term Securities Lending Facility (TSLF), 427b Term structure of interest rates, 160, 176 Terrorist attacks of September 11, 2001, 423b Textbook framework, 56–57 Thailand, financial crisis in (1997), 516 Thatcher, Margaret, 657 Theory of asset demand, bank panics of Great Depression and, 400–402 Theory of bureaucratic behavior, 365 Theory of efficient capital markets, 191 Theory of purchasing power parity (PPP), 480–481, 481–482 Theory of rational expectations See Rational expectations theory Thomas Amendment, 467 Thrift institutions (thrifts), 83, 344–346 Tightening of monetary policy, 358 AD curve shifts from, 576, 578f, 579 transmission mechanisms and, 671 Time deposits See also Certificates of deposit (CDs) bank balance sheet, 266f and bank balance sheet, 266f defined, 84 Time-inconsistency problem exchange-rate targeting and, 524 inflation targeting and, 443 price stability and, 435–436 TIPS (Treasury Inflation Protection Securities), 126b, 545 Tobin, James, 544 n.3, 550, 664 Tobin’s q theory, 664, 665f, 666 Too-big-to-fail policy, government safety net and, 297–298 Trade balance, 505 Trade barriers, foreign exchange rates and, 482, 490 Trading Activities Manual, 303 Traditional banking, decline in, 332–335 information technology and, 326–329 Index in other industrialized countries, 335 in U.S., 333f Transaction costs, 79–80, 97 defined, 79, 97 of financial institutions, 207–208 reduction of, 207–208 Transactions motive, money demand, 543 Transmission, mechanisms of monetary policy See Monetary transmission mechanisms TRAPS (Trading Room Automated Processing System), 418–420 Traveler’s checks, 101, 101t Treasury bills See U.S Treasury Bills Treasury Inflation Protection Securities (TIPS), 126b, 545 Treasury securities, Federal Reserve purchase during Global Financial Crisis, 426 Trichet, Jean-Claude, 366 Troubled Asset Relief Plan (TARP), 241 Truth in Lending Act, 305, 306b Ukraine, 521b Uncertainty central bank behavior and, 365, 365 n.3 Federal Reserve’s lack of transparency and, 446 Unconditional commitment, to future policy actions, 429 Undervaluing of currency, 509 Underwriting securities, 70, 87 Unemployment See also Phillips curve; Short-run aggregate supply curve and aggregate output, 583b Argentine financial crisis (2001– 2002), 259f frictional unemployment, 436, 617 n.4 gap, 618 in Global Financial Crisis (2007– 2009), 551 in Great Depression, 436 inflation and, 639f, 654f natural rate of, 436, 587 Okun’s law, 622–623, 622f, 622 n.7, 623 n.8 rate, defined, 49 South Korean financial crisis (1997–1998), 252f structural unemployment, 436, 617 n.4 supply shocks (1970s-1980s) and, 647, 647 n.1 Volcker disinflation, 599, 600f Unemployment gap, 618 Unemployment rate, defined, 49 Unexploited profit opportunities, 193–194 Unit of account, 96–97 United Kingdom central bank of, 371 See also Bank of England exchange rate on British pound (1990–2011), 477f exchange-rate targeting and, 526 foreign exchange market for British pound (1992), 514– 515, 514f and Global Financial Crisis of 2007–2009, 610–611, 610f government bailout in, 242b inflation targeting in, 441f, 442 monetary policy in, 522 purchasing power parity between U.S and (1973–2011), 481f United States banking industry in, 321–349 central bank See Federal Reserve System; Federal Reserve System (the Fed) financial crises in See Global Financial Crisis of 2007–2009; Great Depression; Stock market declines and crashes purchasing power parity between United Kingdom and (1973–2011), 481f Universal banking, 343–344 Unsecured debt, 206 Unsterilized foreign exchange intervention, 502, 503–504, 503f effect on monetary base, 503 n.1 725 U.S Congress, Federal Reserve System independence and, 360–361, 363 U.S dollar adoption as second currency, 528–529 Euro’s challenge to, 508b Global Financial Crisis and, 493–494 relationship to interest rates (1973–2010), 492–493, 493f unsterilized purchase of, 503f value of, 492–493, 493–494, 493f U.S economy central bank in See Federal Reserve System current account deficit (balance of payments), 504–506 monetary policy and health of See Monetary policy U.S financial system See Financial system U.S Government agency securities as capital market instruments, 74t, 76 U.S government bond market, 71 U.S government bonds, yield curves for, 179f U.S Government securities as capital market instruments, 74t, 76 U.S Treasury deposits at Federal Reserve, 386–387 monetary liability (monetary base) of, 380–381 U.S Treasury bills, 72–73, 72t rates, 73b U.S Treasury bonds, interest rates discussed in the media, 75b Valuation of stocks, 184–185 Value-at-risk (VaR) calculations, 304 Vault cash, as bank asset, 268 Velocity of money, 534–536, 550 defined, 535 determinants of, 535–536 Venture capital firms, 216 726 Index Vietnam War buildup (1964– 1969), 560–561, 562f Virtual bank, 327, 328b Volcker, Paul, 353, 360, 473, 599, 600f appointment of, 658, 658b monetary policy of, 470–471 Volcker Rule, 316 Wall Street Journal See Following the Financial News Wallace, Neil, 643 n.2 Wealth defined, 94–95, 130 as determinant of asset demand, 131, 132t effects, as monetary transmission mechanism, 665f, 666–667 and money demand, 545 shifts in demand for bonds, 137, 138t Web references, 57 aggregate demand and supply analysis, 615 banking and management of financial institutions, 293 demand for money, 550 efficient market hypothesis, 202 Federal Reserve Board, 58f, 106, 159 financial system, 93 Great Depression, 244 gross domestic product, 642 inflation, 159, 642 interest rates, 129, 159, 182 International Monetary Fund, 244 Keynes, John Maynard, 550 “lemons problem,” 226 monetary aggregates, 106 monetary policy theory, 642 money, 106 money, banking and financial markets, 63 stock market, 202 unemployment, 615 velocity of money, 550 World Bank, 507 deposit insurance research, 296b World stock markets, 78 See also Financial Times Stock Exchange (FTSE) 100-Share Index (London) indexes, 79b World Trade Organization (WTO), 507 World War II, pegging of interest rates (1942–1951), 468 World Wide Web See Web references Worldwide government bailouts, in global financial crisis, 242b Yield curves, 176–178, 177f, 178b defined, 168 interpreting, 178 U.S government bonds, 179f Yield to maturity, 112–119 See also Interest rates coupon bonds, 114–118, 116t curve on See Yield curves defined, 108, 112 discount bonds, 118 fixed-payment loans, 113–114 simple loans, 112–113 Zero-coupon bonds See Discount bonds Zero-lower-bound problem, 425, 447, 449–450 Zimbabwean hyperinflation, 542 Guide to Commonly Used Symbols Symbol Term ∆ π πe πt AD AS Bd Bs BR c C C C D D DL e Et Epar (E e t+1 – Et)/Et EM ER change in a variable inflation rate expected inflation inflation target aggregate demand curve aggregate supply curve demand for bonds supply of bonds borrowed reserves currency ratio yearly coupon payment currency consumption expenditure demand curve checkable deposits discount loans excess reserves ratio exchange (spot) rate par (fixed) exchange rate expected appreciation of domestic currency equity multiplier excess reserves for financial frictions government purchases interest rate (yield to maturity) discount rate interest rate on domestic assets interest rate on foreign assets interest rate paid on reserves planned investment spending IS curve money multiplier money supply f G i id iD iF ior I IS m M Symbol Term Md Ms M1 M2 MB MBn MP mpc NBR NX P Ps Pt r r rr R R Re RD RF ROA ROE RR S T V Y Y ad YP demand for money supply of money M1 monetary aggregate M2 monetary aggregate monetary base (high-powered money) nonborrowed monetary base monetary policy curve marginal propensity to consume nonborrowed reserves net exports price level stock prices price of a security at time t price shock real interest rate required reserve ratio for checkable deposits reserves return expected return expected return on domestic deposits expected return on foreign deposits return on assets return on equity required reserves supply curve taxes velocity of money aggregate output (national income) aggregate demand potential (natural rate level of) output I I - > ~ ... Economics of Macro Issues Miller/Benjamin/North The Economics of Public Issues Mills/Hamilton Urban Economics Mishkin The Economics of Money, Banking, and Financial Markets* The Economics of Money, Banking, ... content The Web chapters for the Tenth Global Edition of The Economics of Money, Banking, and Financial Markets include the unique chapters from the Business School Edition and a Web chapter on the. .. discussion of monetary theory and monetary policy, The Economics of Money, Banking, and Financial Markets, Tenth Global Edition, contains all of the chapters on monetary theory Professors who