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Financial Markets, Banking, and Monetary Policy

Book Description

Praise for Financial Markets, Banking, and Monetary Policy

"A lucid treatment that takes on board shadow-banking, Dodd-Frank, the zero lower bound, and forward guidance. In short, all the key post-crisis issues."

—Anil Kashyap, Edward Eagle Brown Professor of Economics and Finance, University of Chicago

"The financial sector is a vital component of the US economic machinery. The Federal Reserve works within this sector to promote its congressional mandates of maximum employment and low inflation. Unfortunately, the contribution of the financial system to the economy's performance is not well understood. Students of standard college courses on money, banking, and monetary policy often find that the textbooks have not kept pace with the evolution of the financial sector, including the rise of securitized finance and the Federal Reserve's evolving monetary operations. Tom Simpson's book represents a huge step forward in this regard. His comprehensive exposition of the essential parts of the financial system and modern explanation of how the Federal Reserve supports the economy gives readers a much better understanding of the US financial system and the Federal Reserve."

—James Glassman, Managing Director and Head Economist for the Commercial Bank, JPMorgan Chase & Co.

"Financial Markets, Banking, and Monetary Policy by Tom Simpson provides a comprehensive introduction to the financial system, including the markets, institutions, and mechanisms of finance, as well as the role of the Federal Reserve and monetary policy. The economic principles underlying finance are woven through the chapters, and the book includes an insightful introduction into the causes of and responses to the recent financial crisis. Tom Simpson has had a front-row seat on financial developments in recent decades and has written a book that provides an ideal introduction to the financial system and monetary policy."

—Dan Sichel, Professor of Economics, Wellesley College

Table of Contents

  1. Preface
  2. CHAPTER 1: Introduction
    1. What You Will Learn in This Chapter
    2. Overview
    3. Where We Are Going in This Book
    4. Contributions Made by the Financial System
    5. Recurring Themes in the Chapters Ahead
    6. Resources
    7. Summary
    8. Questions
    9. Notes
  3. CHAPTER 2: Overview of the Financial System
    1. What You Will Learn in This Chapter
    2. Introduction
    3. Features of an Effective Financial System
    4. Direct Methods of Finance
    5. Indirect Methods of Finance
    6. Primary versus Secondary Markets
    7. Summary
    8. Questions
    9. Notes
  4. CHAPTER 3: The Special Role of Commercial Banks
    1. What You Will Learn in This Chapter
    2. Background
    3. Commercial Bank Balance Sheet
    4. Payment System and Money
    5. Liquidity Provision
    6. Dealing with Asymmetric Information
    7. Maturity Transformation
    8. The Safety Net and Regulatory Policy
    9. Summary
    10. Questions
    11. Notes
  5. CHAPTER 4: The Pricing of Financial Assets
    1. What You Will Learn in This Chapter
    2. Background
    3. Present Value
    4. Maturity and Price Sensitivity
    5. Holding Periods versus Maturities
    6. Return versus Yield
    7. Duration
    8. Nominal versus Real Yields
    9. Summary
    10. Questions
    11. Appendix A: Variations of the Valuation Relationship
    12. Appendix B: Solutions Using a Financial Calculator
    13. Notes
  6. CHAPTER 5: Factors Affecting Yields
    1. What You Will Learn in This Chapter
    2. Background
    3. The Term Structure of Interest Rates
    4. Credit Risk
    5. Liquidity
    6. Taxation
    7. Embedded Options
    8. Flights to Safety
    9. Summary
    10. Questions
    11. Notes
  7. CHAPTER 6: Principles of Portfolio Selection and Efficient Markets
    1. What You Will Learn in This Chapter
    2. Overview
    3. Uncertainty, Expected Return, and Risk
    4. Selecting a Portfolio
    5. Efficient Portfolios and Risk-Return Trade-Offs
    6. Efficient Markets Hypothesis
    7. Summary
    8. Questions
    9. Notes
  8. CHAPTER 7: The Money Market
    1. What You Will Learn in This Chapter
    2. Background and Basic Features of the Money Market
    3. Pricing
    4. Treasury Bills
    5. Commercial Paper
    6. The Role of Commercial Banks in the Money Market
    7. Letters of Credit and Bankers’ Acceptances
    8. Monetary Policy Effects on the Money Market
    9. Summary
    10. Questions
    11. Notes
  9. CHAPTER 8: The Bond Market
    1. What You Will Learn in This Chapter
    2. Background
    3. Treasury Notes and Bonds
    4. Corporate Bonds
    5. Munis
    6. Government-Sponsored Enterprises (GSEs)
    7. The Impact of Monetary Policy on the Bond Market
    8. Summary
    9. Questions
    10. Notes
  10. CHAPTER 9: Securitization
    1. What You Will Learn in This Chapter
    2. Background
    3. Obstacles to Overcome
    4. Beginnings of Securitization—MBSs
    5. Other Securitized Loans—Consumer ABSs
    6. ABSs Involving Business Credit—CDOs and Structured Securities
    7. Securitization and the Integration of Credit Markets
    8. Monetary Policy and Securitization
    9. Summary
    10. Questions
    11. Notes
  11. CHAPTER 10: The Mortgage Market
    1. What You Will Learn in This Chapter
    2. Background
    3. Home Mortgages
    4. Commercial Mortgages
    5. The Mortgage Market and Monetary Policy
    6. Summary
    7. Questions
    8. Notes
  12. CHAPTER 11: The Equity Market
    1. What You Will Learn in This Chapter
    2. Background
    3. Equities as a Source of Corporate Finance
    4. Preferred versus Common Shares
    5. Primary and Secondary Markets
    6. Valuation of Individual Shares
    7. Price-Earnings
    8. Extending These Principles to the Stock Market
    9. Monetary Policy and the Stock Market
    10. Indexes of Stock Prices
    11. Summary
    12. Questions
    13. Notes
  13. CHAPTER 12: Central Banking and the Federal Reserve
    1. What You Will Learn in This Chapter
    2. Background
    3. Origins of Central Banks
    4. Constitutional Foundations
    5. The Century and a Quarter without a Central Bank
    6. Creation of the Federal Reserve
    7. Early Years of the Federal Reserve
    8. Reforms of the 1930s
    9. Fed Independence
    10. Central Bank Accountability and Transparency
    11. Central Bank Responsibilities
    12. Monetary Operations
    13. Summary
    14. Questions
    15. Notes
  14. CHAPTER 13: Monetary Policy: The Basics
    1. What You Will Learn in This Chapter
    2. Background
    3. Effects of Monetary Policy on Output and Prices
    4. The Operational Counterparts to Maximum Employment and Price Stability
    5. Aggregate Demand and Aggregate Supply
    6. The Model
    7. Addressing Inflation
    8. Addressing a Shortfall in Output
    9. Okun’s Law
    10. Summary
    11. Questions
    12. Notes
  15. CHAPTER 14: Monetary Policy: Challenges Faced by Policymakers
    1. What You Will Learn in This Chapter
    2. Background
    3. Other Forces Affecting Output and Inflation
    4. Lags and Other Complications
    5. Policy Rules
    6. Expectations and Central Bank Credibility
    7. Inflation Targeting
    8. The Zero-Bound Constraint and the Slow Recovery from the Great Recession
    9. Summary
    10. Questions
    11. Notes
  16. CHAPTER 15: Financial Crises
    1. What You Will Learn in This Chapter
    2. Background
    3. Classic Banking Panics
    4. The Nightmare of the Great Depression
    5. Broader Financial Crises
    6. The Financial Crisis
    7. Common Threads
    8. Summary
    9. Questions
    10. Notes
  17. CHAPTER 16: The Foreign Exchange Market and Exchange Rate Regimes
    1. What You Will Learn in This Chapter
    2. Background
    3. Features of the Market
    4. The Relation Between Spot and Forward Exchange Rates
    5. Long-Run Exchange Rate Relationships
    6. The Real Exchange Rate
    7. Exchange Rate Determination in the Shorter Run
    8. Floating Exchange Rate Regime
    9. Fixed Exchange Rate Regime
    10. Summary
    11. Questions
    12. Notes
  18. CHAPTER 17: Depository Institutions
    1. What You Will Learn in This Chapter
    2. Background
    3. Organization of Commercial Banks and Other Depository Institutions
    4. Economic Functions of Depository Institutions
    5. The Balance Sheet of the Commercial Banking System
    6. The Balance Sheet of Savings Institutions
    7. The Balance Sheet of Credit Unions
    8. Deposit Insurance
    9. Regulation and Supervision of Depository Institutions
    10. Depository Institutions and Monetary Policy
    11. Summary
    12. Questions
    13. Notes
  19. CHAPTER 18: Mutual Funds
    1. What You Will Learn in This Chapter
    2. Background
    3. History
    4. SEC Regulation
    5. Role of Mutual Fund Complexes
    6. Types of Funds
    7. Mutual Funds and Monetary Policy
    8. Summary
    9. Questions
    10. Notes
  20. CHAPTER 19: Hedge, Venture Capital, and Private Equity Funds
    1. What You Will Learn in This Chapter
    2. Background
    3. Commonalities in Structure
    4. Hedge Funds
    5. Venture Capital Funds
    6. Private Equity Funds
    7. Alternative Investment Funds and Monetary Policy
    8. Summary
    9. Questions
    10. Notes
  21. CHAPTER 20: Large Institutional Investors
    1. What You Will Learn in This Chapter
    2. Background
    3. Pension Funds
    4. Life Insurance Companies
    5. Property and Casualty Insurance Companies
    6. Large Institutional Investors and Monetary Policy
    7. Summary
    8. Questions
    9. Notes
  22. About the Author
  23. Index
  24. End User License Agreement