A new application on lessons from the subprime financial crisis: when are financial derivatives likely to be a worldwide time bomb? (Chapter 14) A new section on monetary policy at the effective lower bound for the overnight interest rate (Chapter 17)
A new Inside the Central Bank box on monetary policy at times of crisis (Chapter 17)
A new section on preemptive strikes against economic downturns and finan- cial disruption during the subprime meltdown (Chapter 18)
A new section on lessons from the subprime crisis as to how central banks should respond to asset-price bubbles (Chapter 18)
A new application on the subprime crisis and the dollar (Chapter 19) A new box on the subprime financial crisis and the IMF (Chapter 20)
A new application on the perfect storm of shocks: negative supply shocks and the subprime financial crisis (Chapter 24)
A new application on the subprime recession (Chapter 25)
There have also been changes in financial markets and institutions in recent years that have not been directly related to the subprime financial crisis, and we have added the following new material to keep the text current:
A new section on the positive role that lawyers play in our financial system, entitled Let the Lawyers Live! (Chapter 8)
A new box on subprime mortgages in Canada (Chapter 9) A new box on how well Basel 2 will work (Chapter 10)
A rewritten section on financial innovation and the growth of the shadow banking system (Chapter 11)
A new section on credit insurance (Chapter 12)
A new section on private equity and venture capital funds (Chapter 12) A new box on sovereign wealth funds and whether they pose a danger (Chapter 12)
A new box on the Montreal Exchange and the Canadian Derivatitives Clearing Corporation (Chapter 14)
We have added new material on monetary theory and policy over and above that which was related to the subprime financial crisis:
A rewrite of Chapter 17 to reflect recent developments in Bank of Canada oper- ating procedures
Expanded discussion of the Taylor Rule (Chapter 18)
A new section on preemptive strikes against inflation (Chapter 18)
A new section on preemptive strikes against economic downturns and finan- cial disruptions (Chapter 18)
Preface xxiii
Additional New Material on Financial Markets and Institutions
New Material on Monetary Theory and Policy
xxiv Preface
The chapter on the determination of exchange rates has always been challenging for some students. In the Third Edition, we moved the analysis closer to a more traditional supply and demand analysis to make it more intuitive. Although this change has been very well received by instructors, we decided that the model of exchange rate determination could be made even easier for students if we relegated the calculation comparing expected returns and the interest parity conditions to an appendix. Doing so in the fourth Canadian edition simplifies discussion apprecia- bly and should make the analysis of exchange rate determination much more acces- sible to students.
Helpful comments from reviewers prompted us to improve the exposition throughout the book. The reviewers convinced us that we could simplify and con- dense the discussion of how the money supply is determined by combining Chapters 15 and 16 from the third Canadian edition into a new chapter. The result- ing new Chapter 16, entitled The Money Supply Process, does not lose any con- tent and works even better in the classroom than the two chapters in the Third Edition. Also, at the suggestion of several reviewers, we simplified the exposition at the beginning of Chapter 24 of how the aggregate demand curve is derived.
The MyEconLab website that accompanies this book (www.myeconlab.com) is an essential resource for additional content.
The web appendices for the fourth Canadian edition of The Economics of Money, Banking, and Financial Markets include:
Chapter 1: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate
Chapter 4: Measuring Interest Rate Risk: Duration Chapter 5: Models of Asset Pricing
Chapter 5: Applying the Asset Market Approach to a Commodity Market:
The Case of Gold
Chapter 7: Evidence on the Efficient Market Hypothesis Chapter 10: Banking Crises Throughout the World Chapter 13: Measuring Bank Performance
Chapter 13: Nonbanking Financial Institutions and Duration Analysis Chapter 15: The Price Stability Goal and the Nominal Anchor
Chapter 16: The Bank of Canada s Balance Sheet and the Monetary Base Chapter 16: The M2+ Money Multiplier
Chapter 19: The Interest Parity Condition Chapter 20: The Canadian Balance of Payments
Chapter 21: A Mathematical Treatment of the Baumol-Tobin and Tobin Mean-Variance Models
Chapter 21: Empirical Evidence on the Demand for Money Chapter 23: Algebra of the ISLM Model
Mini-cases available on MyEconLab include:
Chapter 4: Interest Rates, Bond Yields, and Duration Chapter 5: The Behaviour of Interest Rates
Improved Exposition and Organization Further
Simplification of the Supply and Demand Analysis of the Foreign
Exchange Market
Appendices and Mini-Cases on the Web
Chapter 6: Yield Curve Hypotheses and the Effects of Economic Events Chapter 7: Adaptive Expectations, Rational Expectations, and Optimal
Forecasts
Chapter 11: The Changing Landscape for Domestic and Global Financial Markets
Chapter 13: Bank Performance Analysis
Chapter 13: Calculating and Comparing Gap, Duration, and Risk- Management Alternatives
Chapter 14: Micro Hedge, Macro Hedge, Managing Interest-Rate Risk, and Duration
Chapter 19: The Foreign Exchange Market and Financial Derivatives Instructors can either use these web appendices and mini-cases in class to sup- plement the material in the textbook, or recommend them to students who want to expand their knowledge of the money and banking field. The answers to the web mini-cases are available in the Instructor s Manual.
FLEXIBILITY
In using previous editions, adopters, reviewers, and survey respondents have con- tinually praised this text s flexibility. There are as many ways to teach money, banking, and financial markets as there are instructors. To satisfy the diverse needs of instructors, the text achieves flexibility as follows: