The Economics of Money, Banking, and Financial Markets, 13e Mishkin pdf

The Economics of Money, Banking, and Financial Markets, 13th Edition

Frederic S Mishkin

ISBN-13: 9780136893929

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Contents

PART I: INTRODUCTION

1. Why Study Money, Banking, and Financial Markets?

2. An Overview of the Financial System

3. What Is Money?

PART II: FINANCIAL MARKETS

4. The Meaning of Interest Rates

5. The Behavior of Interest Rates

6. The Risk and Term Structure of Interest Rates

7. The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

PART III: FINANCIAL INSTITUTIONS

8. An Economic Analysis of Financial Structure

9. Banking and the Management of Financial Institutions

10. Economic Analysis of Financial Regulation

11. Banking Industry: Structure and Competition

12. Financial Crises

PART IV: CENTRAL BANKING AND THE CONDUCT OF MONETARY POLICY

13. Central Banks and the Federal Reserve System

14. The Money Supply Process

15. Tools of Monetary Policy

16. The Conduct of Monetary Policy: Strategy and Tactics

PART V: INTERNATIONAL FINANCE AND MONETARY POLICY

17. The Foreign Exchange Market

18. The International Financial System

PART VI: MONETARY THEORY

19. Quantity Theory, Inflation, and the Demand for Money

20. The IS Curve

21. The Monetary Policy and Aggregate Demand Curves

22. Aggregate Demand and Supply Analysis

23. Monetary Policy Theory

24. The Role of Expectations in Monetary Policy

25. Transmission Mechanisms of Monetary Policy

ADDITIONAL CHAPTERS IN MYLAB ECONOMICS

1. Financial Crises in Emerging Market Economies

2. Nonbank Finance

3. Financial Derivatives

4. Conflicts of Interest in the Financial Services Industry

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Overview

Description

To study money and banking, as well as general economics.

A unified framework to understand financial markets

The Economics of Money, Banking and Financial Markets provides a fresh view on the major financial policy questions of today. Frederic Mishkin's tenure as Governor of Federal Reserve has influenced his unique perspective and informed insight on the monetary policy process, financial regulation, supervision, and internationalization. The 13th Edition is a comprehensive, analytical framework that allows for learning across a range of subjects. Core economic principles and real-world examples help students organize their thinking and keep them inspired. This text will equip students with the knowledge and skills to apply financial terms, models, and equations to make decisions that have a direct impact on their professional and personal lives.

MyLab Economics with Pearson eText - Reach all students

MyLab (r), allows you to reach all students. This digital platform offers unrivalled content, online assessments and customizable features that allow you to personalize learning, improve results, and make it easier for every student.

Pearson MyLab offers an easy-to use digital textbook that allows students to highlight, highlight, take note, and review key vocabulary in one location. MyLab is not required for purchase. However, students can order Pearson eText by themselves or assign it to a course. You can view analytics and share notes with students, schedule readings, and see student usage statistics.

About

Updated coverage of major economic events

  • NEW - Compelling n ew m Italics on the c Oronavirus p andemic The book has many sections, applications, boxes, and boxes that have had monetary policy added. This spotlights the importance of financial markets and banks to the economy's health. Highlights include:

    • NEW This new application focuses on the coronavirus stock exchange crash of 2020 (Chapter7), and the likelihood that another financial crisis could result (Chapter12).

    • NEWAn application that examines the impact of quantitative easing upon the money supply during the coronavirus epidemic (Chapter 14), this shows how to adapt the model of money supply to the most recent data.

    • UPDATED This update to the section about nonconventional tools for monetary policy and quantitative easing discusses how they were used in the context of the coronavirus epidemic (Chapter15).

  • NEW - Reportage on other developments in the field of Banking and money Keep the text relevant and current. They include:

    • NEWAn application that shows the effect of Trump's tax cuts (Chapter 6) on bond interest rates. It illustrates how supply and demand analysis can be used in order to understand the impact of taxes on different interest rate.

    • NEW News Inside the Fed boxes discussing the Fed's independence (Chapter 13), as well as the modification of inflation targeting to be a monetary policies tool.

    • NEW A new FYI Box on Modern Monetary Theory, Chapter 19, discusses this theory which argues that the Green New Deal is easily payable by having the Federal Reserve purchase government bonds to cover the large budget gaps.

Effective teaching and learning is possible with a well-planned structure and organization

  • A unifying and analytic frameworkteaches students basic economic principles. This allows them to understand the structure and financial market changes and how financial institutions manage foreign exchange.

  • It is easier for students to learn about economic models with a carefully developed, step-by–step approach (the same method used in the best economics textbooks).

  • REVISED - An actual-world approach in monetary theory employs real data to analyze aggregate demand and supply for business cycle episodes. This makes analysis more applicable to students, as they can see the data live.

  • This flexible and modular design suits the varied needs of instructors. Instructor preferences may dictate which chapters or sections are included in the book. Core chapters provide the foundational analysis.

Learner - oriented r resources help students comprehend and retain the material

  • Mini-Lecture Videos provide students with clear captions to help them understand the interrelationships of the plotted variables, and the principles behind analysis.

  • Students can get a sense of the operation and structure by visiting the Fed boxes

  • More then 50 Applicationshow how the presented analysis can help to explain many important real world situations.

  • FYI boxes highlight dramatic historical episodes, fascinating ideas, and interesting facts related to the contents of the chapter.

  • More then 600 e questions and applied problemshelp students to learn the subject matter using economic concepts.

Additional features Students can develop their career skills

  • UPDATED Introduce students to the Financial News boxes and teach them how they can interpret the data. This skill will make them more productive in their future jobs.

  • UPDATED – Reliable Data Figures in the eText pull data from the Federal Reserve Bank of St. Louiss FRED to help explain economic concepts, such as Covid-19, and show students where and when they can access it throughout their career.

Reach every student using MyLab

Teach courses your way

  • LMS integration lets you link your MyLab courses from Blackboard Learn or Brightspace (r), by D2L [r], Canvas or Moodle [r].

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Deliver trusted content

  • Homework and practice exercises are linked to the exercises in text. They reflect each author's approach and learning style. They can be regenerated algorithmically, giving students endless opportunities to practice and mastery.

  • Easy to assign, and automatically graded, Data Analysis Exercises utilize up-to the minute macroeconomic data from FRED, the Federal Reserve Bank of St. Louiss, to test students knowledge.

Empower learners

  • Help me Solve This and other learning tools provide additional assistance for students right at the point-of use.

This Edition Features a New Version

Updated coverage of major economic events

  • Compelling n ew m The category c Oronavirus p andemic The book has many sections, applications and boxes that have had monetary policy added. This spotlights the importance of financial markets and banks to the economy's health. Highlights include:

    • A new application regarding the coronavirus stock exchange crash of 2020 (Chapter 7) and the possibility that the pandemic might lead to another financial crisis in the future (Chapter 12).

    • A new application to the effects that quantitative easing had on the money supply in the coronavirus crisis (Chapter 14), shows how the model of money supply can be applied to current data.

    • A revision to the section on nonconventional tools for monetary policy and quantitative easing, to discuss how they were utilized during the coronavirus pandemic. (Chapter15).

  • Reportage on other developments in the Field of Banking and money Keep the text relevant and current. They include:

    • A new application is available on the effects the Trump tax cuts have on bond interest rates (Chapter 6, which shows how supply/demand analysis of bond markets can be used in order to explain the effect taxes have on different interest rates.

    • New Inside the Fed boxes look at the Fed's independence (Chapter 3) and inflation targeting as a tool for monetary policy.

    • FYI box 19: Modern Monetary Theory - A new FYI box. This discusses this new theory, which argues that the Green New Deal is easily payable by having the Federal Reserve purchase government bonds to cover the large budget gaps.

A well-planned structure and organization will facilitate effective teaching and learning

  • An actual approach to monetary analysis is more realistic. It uses real data to analyze aggregate demand and supplies of business cycle episodes. Students are able to see the data live, which makes it more relevant for them.

Additional features Students can develop their career skills

  • Follow the Financial News Boxto introduce students to news articles and data reported daily in the media and teach students how this data can be used to improve their job prospects.

  • Real-Time Figuresin eText pulls real data from FRED, Federal Reserve Bank of St. Louiss database, to help students understand economic concepts, such as Covid-19, and show them how and where they can find it throughout their career.

About the Authors


Frederic S. Mishkin, the Alfred Lerner Professor of Banking and Financial Institutions in the Graduate School of Business at Columbia University. He is also a Research Associates at the National Bureau of Economic Research. He was co-director of US Monetary Policy Forum and a member of Squam Lake Working Group on Financial Reform. He is past president of Eastern Economics Association. He received his PhD in 1976 from the Massachusetts Institute of Technology. He has also taught at Columbia University (Norway University), Princeton University (Princeton University), and the University of Chicago. He also holds an honorary professorship at the Peoples (Renmin) University of China. He served as the Federal Reserve Bank of New York's Executive Vice President, Director of Research, and associate economist of its Federal Open Market Committee. From September 2006 through August 2008, he served as a governor (member) on the Board of Governors of Federal Reserve System.

Professor Mishkins studies monetary policy and how it affects financial markets and the overall economy. More than 20 books have been published by him, including Macroeconomics Policy and Practice 2nd Edition (Pearson), Financial Markets and Institutions 9th Edition (Pearson), 2018); Monetary Policy Strategy (MIT Press), 2007; The Next Great Globalization. How Disadvantaged Countries Can Harness their Financial Systems to Get Rich (Princeton University Press), 2006); Inflation targeting: Lessons From the International Experience (Princeton University Press), 1999); and Money, Interest Rates and Testing Policy Ineffectiveness and efficient market models (University of Chicago Press) 1983). Additionally, he has published more 200 articles in journals like American Economic Review (Journal of Political Economy), Econometrica ; Quarterly Journal of Economics (Journal of Finance), Journal of Monetary Economics (University of Chicago Press, 1983); and Money, Interest Rates, and Inflation: Testing Policy Ineffectiveness and Efficient Markets Models (University of Chicago Press, 1993).

Professor Mishkin served on the American Economic Review editorial board and was an associate editor at Journal of Business and Economic Statistics, Journal of Applied Econometrics, Journal of Economic Perspectives, Journal of Economic Perspectives, Journal of Economic Perspectives, Journal of Economic Perspectives, Journal of International Money and Finance, and Journal of Money, Credit and Banking. Additionally, he was the editor of Federal Reserve Bank of New Yorks Economic Policy Review Economic Policy Review Economic Policy Review . He is currently an associate editors (member of the editing board) at six academic journal, including International Finance and Finance India. He has served as a consultant for the Board of Governors of The Federal Reserve System, World Bank and International Monetary Fund as well as other central banks around the world. He was also a member of South Korea’s International Advisory Board and an advisor for the Institute for Monetary and Economic Research at Bank of Korea. Professor Mishkin was a Senior Fellow of the Federal Deposit Insurance Corporations Center for Banking Research and served as an academic advisor to and member of the Federal Reserve Bank of New York's Economic Advisory Panel and Monetary Advisory Panel.


There is no money and no inflation in the economy

Most people assume that economics refers to the study and application of money. However, there is a paradox to the role of money and economic policy. The central objective of central bankers is price stability, while their attention has declined on money.

It was no accident that the economic establishment ignored money during the post-war "Great Inflation". The counter-revolution of economics in the 1970s saw money return to the centre of economic policy. It was the belief that money, in the long term, affected the price level rather than the output level. Milton Friedman stated that "inflation" is a monetary phenomenon. If inflation were a monetary phenomenon then controlling the money supply would be the key to low inflation. Monetary aggregates are now central to monetary policy. The passage to low inflation was not easy. The attempts of central banks to control the monetary assets did not find favor with them. Gerald Bouey (the Governor of the Bank of Canada at that time) stated, "We didn't abandon monetary aggregates; they abandoned us."

As central banks became increasingly focused on maintaining price stability, the attention paid to money movements dropped. The decline in money interest seemed to go hand-in-hand with stability and low inflation. How can we explain the paradox that acceptance of the notion that inflation is a monetary phenomenon has been accompanied with the absence of any reference to money during the most successful period of monetary policies? My talk will focus on this paradox.

Some central banks, including the Bundesbank and Swiss National Bank paid great attention to monetary assets. When the European Central Bank was given responsibility for monetary policies, it decided to adopt a reference value of money growth as one of two pillars. The other pillar included an assessment of inflation's outlook. Recent changes by the Swiss National Bank to their target for the inflation monetary aggregates were made. At its request, the Federal Reserve was relieved from 1978's statutory obligation to report twice annually on its target ranges in credit and money growth. Larry Meyer, the Federal Reserve Board Governor, stated earlier this year that "money does not play an explicit role in today’s consensus macro model and in the conduct or monetary policy."

A decrease in references to money in speeches of central bank governors can be seen as evidence of the declining importance of money for policy making. This is so because, over the past two-years, Governor Eddie George of Bank of England made just one mention of money in 29 speeches. Chairman Greenspan of Federal Reserve, one out 17, Governor Hayami of Bank of Japan, one out 11, and Wim Düisenberg, of European Central bank, three out 30.

Evidence of money and inflation

Let me start by reviewing some historical evidence. Chart 1, which extends McCandless & Weber (1995)'s results, shows the correlation of inflation and the growth in the monetary base over different time periods for a large sampling of 116 countries. Higher inflation is experienced by countries that have higher money growth rates. CHART 1 shows clearly that the correlation between money growth, inflation, and time horizon is longer. Inflation and monetary growth are much more closely related in the short-term. Understanding why this happens is at the heart monetary economics. This still presents problems to economists trying understand the effects of money on an economy. I will return to this topic later.

Few economic phenomena are as well documented and consistent as the co-movement money and inflation. Chart 2 shows this relationship for both the broad money and the base monetary. Chart 3 illustrates the other side to the close relationship between prices and money. It shows that there is no long term relationship between output growth and money. The correlation coefficient between growth rates for narrow and wide money and inflation was 0.99 in the period 1968-1998. In inverse proportion, the correlation coefficient between growth of narrow money & real output growth (- 0.09) and between broad money & output growth (- 0.08).

Chart 2 However, correlation does not necessarily mean causation. The essence and purpose of monetary theory are to try to understand. Structural Relationship between money demand, money growth, output, price movements and money supply. Stable structural relationships may lead to instabilities in the short run between any of these variables. It's not surprising, then, that economists believe that the short-term instability of observed correlations casts doubts on the long-term significance of money growth in the inflationary process. Chart 4 shows the UK's price levels and their relationship to the money-to-real income ratio over the period 1885-1998. As well as the long-term relationship between inflation and money, there are short-term changes in the velocity of money.


Regressions of inflation and output on the growth of monetary money have been used to support the belief that money does not matter. These regressions show that money has a limited or insignificant influence. However, these results are not indicative of the role of money in monetary policy's transmission mechanism. These results are based upon what economists refer to as reduced-form equations. Their coefficients will be complex functions that reflect the true structural parameters of an economy and the expectations for future policy responses from the monetary authorities. Inflation and output growth are not expected to be in a straight line.

8This was the last point Friedman and Schwartz clearly understood in their 1963 study of money in America. They were careful to pinpoint periods where there was an exogenous change in the money supply. These included movements on and off the gold-standard and changes to bank reserve requirements. Modern studies like Estrella and Mishkin (1997), Hendry (192001), Gerlach and Svensson(2000), Stock and Watson (99) show conflicting and unstable regression results about the impact of money growth on inflation.

It is essential to have a clear theoretical model that explains the true role and function of money. The model should also include expectations. Extreme cases of high inflation are known as hyperinflations. This illustrates the importance of expectations. Hyperinflations magnify the effects of expectations on money, inflation, and other influences such as the business cycle.

Two of these were drawn from inter-war periods, namely hyperinflations that occurred in Austria and Hungary. The other two are postwar hyperinflations that took place in Argentina and Israel. These hyperinflations were at their highest with annual inflation rates of 9,244%. 4,300%. 20266% and 486%. Each of these hyperinflations highlights the importance and impact of expectations. Two inter-war hyperinflations saw large government deficits monetised. This led to rapid money and inflation. The public attempted to reduce their money holdings and real money demand declined. Inflation expectations changed dramatically when credible fiscal stabilisations were announced. It led to a rapid drop in inflation. The lower inflation encouraged real money demand and nominal money growth to continue rising for some time after inflation had dropped. Inflation, therefore, was stable ahead slowdown in money-growth, even though the cause ran away from the credible announcement about monetary contraction to lower inflation. The announcement dates for stabilisation packages are shown in the charts as the vertical lines. The 1991 convertibility program established a currency board in Argentina to support the local currency against the US dollar. This helped stabilize inflation expectations in Argentina. Inflation expectations dropped and, like in other cases, the fall of inflation preceded the slowdown money growth. Israel's situation is slightly different. The gap between the announcement in 1985 and the implementation in 1985 of the stabilisation programme was not delayed. While hyperinflations can be extreme, they show that, even though monetary contraction may be the cause of a fall of inflation, the quick response of expectations means inflation could fall before signs of slowing monetary expansion.

To move forward, we need to have a more comprehensive account of the role that money plays in the transmission system. I will now do this.

Understanding the role and importance of money

It is a common joke that economists spend their time trying understand how something that works in reality can work theoretically. This is a great example of the role money plays in the economy. Economists have relied on two types "rigidities" when modeling the monetary transmission mechanism. These introduce time lags in the process by which changes to money cause price changes. These are lags that occur in the adjustment and adjustment of wages and prices to change in demand, also known as "nominal rigidities", and lags that occur in the adjustment and adjustment of expectations to changes to the monetary policies regime, also known "expectational rigidities". These rigidities are a sign that money can have an effect on real variables in the short-term and prices long-term.

However, we don't know enough to explain rigidity in either direction and also how the short-run will turn into the long term. Milton Friedman said that there are "long-term and variable" time delays between changes in monetary policies and their impact upon inflation. These theoretical weaknesses can be understood by looking at an abbreviated history that economists used to analyse the effect of money. The consensus model, or standard, consists of four equations (see TABLE 1) First, the equation for aggregate consumption is a function of total demand and money interest rates. Second, it relates expected inflation to total demand. Sometimes called the "IS curve", the aggregate demand function can also be known as "IS curve". A second equation describes the supply side. This is the Phillips-Lucas supply curva. It relates total output to actual and expected inflation. There is also an equation to describe the demand for money, which relates total expenditures to broad money holdings. This is the "LM" curve. Fourth, there's an equation that describes monetary policies. It states that the supply of money is determined by how the central bank controls base money (bank notes plus coin in circulation) and this in turn affects the money provided by banks through the "money multiplier". This equation shows the central bank's monetary policies reaction function. The model calculates the output, inflation and interest rates, as well as money growth. A variant of this four-equation model is used to analyze monetary policies. It has an increasing weight over time due to the Phillips curve role of expectations.