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Library of Congress Cataloging-in-Publication Data

Mishkin, Frederic S

The economics of money, banking, and financial markets I Frederic

Mishkin 9th ed (and the 2nd ed of the business ed.)

p em (The Addison-Wesley Series in economics)

Includes bibliographical references and index

ISBN-1 3: 978-0-321 -59979-7 (main edition· alk paper)

ISBN-1 0 : 0 -321 -59979-9 (main edition alk paper)

ISBN-1 3: 978-0-321 -59988-9 (business edition alk paper)

ISBN-1 0 : 0 -321 -59988-8 (business edition : alk paper)

l Finance 2 Money 3 Banks and banking I Title

To Sally

Why Study Money, Banking, and Financial Marketsl

An Overview of the Financial System What Is Money ?

Financial Markets 67

4 U nderstanding Interest Rates The Behavior of Interest Rates

3 25 53

6 9 91

6 The Risk and Term Structure of Interest Rates 1 23 The Stock Market, the Theory of Rational Expectations,

and the Efficient Market Hypothesis

Financial Institutions 167

An Economic Analysis of Financial Structure financial Crises and the Subprime Meltdown

10 Banking and the Management of Financial Institutions

11 Economic Analysis of Financial Regulation

12 Banking Industry : Structure and Competition

Central Banking and the Conduct

of Monetary Policy 313

13 Central Banks and the Federal Reserve System

14 The Money Supply Process

15 The Tools of Monetary Policy

16 The Conduct of Monetary Policy: Strategy and Tactics

1 47

1 6 9 1 99

225 255

281

31 5 345 373

395

International Finance and Monetary Policy 431

17 The Foreign Exchange Market 4 33

Monetary Theory 497

19 The Demand for Money

20 The ISLM Model

21 Monetary and Fiscal Policy in the ISLM Model

22 Aggregate Demand and Supply Analysis

23 Transmission Mechanisms of Monetary Policy: The Evidence

24 Money and ln!lation

25 Rational Expectations: Implications for Policy

499

51 9

543 56 5 587

6 1 7

6 43

vii

: CONTENTS

CHAPTER I

Why Study Financial Marketsl 3 The Bond 1-larket and !merest Rates

The Srock Marker Why Study Financial Institutions and Banking' St.rucmrc of rhe Financial System

Financial Crises Banks and Other Financial Institutions Financial lnnovar.ion

Why Study :v!oney and Monetary Policyl t-,,toncy and Business Cycles

Money and Inflation 1,toncy and Imeresr Rates Conduct of Monetary Policy Fiscal Policy and Monetary Policy Why Study International Finance' The Foreign Exchange Marker The International Financial System How We Will Study :v!oney, Banking, and Financial Markets Exploring the Wr·b

CollecLing and Graphing Data Web Exercises

5

10 10 12

Summary 18 • Key Terms 19 • Questions and Problems 19 • Web Exercises 20 • Web References 20

APPENDIX TO CHAPTER I Defining Aggregate Output, Income, the Price Level,

Aggregate Output and Income Real Versus Nominal Magnitudes Aggregate Price Level Growth Rates and the Inllation Rate

CHAPTER 2

21 21 22

23

ix

Debt and Equity Markets 27

Following the Financial News Money Market Rates 31

Following the Financial News Capital Market Interest Rates 34

Internationalization of Financial Markets

Global Are U.S Capital Markets Losing Their Edgel 36

36

lntcrnar.ional Bond Market, Eurobonds, and Eurocurrencies 37

Following the Financial News Foreign Stock Market Indexes 38

Function of Financial Intermediaries: Indirect Finance 39

Global The Importance of Financial Intermediaries Relative to Securities Markets:

An International Comparison 4 0

Risk Sharing

Asymmclric Information: Adverse Sc1ection and T\.foral Hazard

Types of Financial Intermediaries

Depository InsLilulions

Contracwal Savings Institutions

lnvcstmcnt lnrcrmcdiaries

Regulation of the Financial System

Increasing Information Available w lnvcsr.ors

Ensuring the Soundness of Financial lmermcdlaries

Financial Regulation Abroad

Summary 49 • Key Terms 50 • Questions and Problems 51 •

\Veb Exercises 51 • \Veb References 52

CHAPTER 3

40

4 1 42

43

44 45 46 46

57

The Federal Reserve's !vionctary Aggrcgar.cs

Following the Financial News The Monetary Aggregates 6 1

FYI Where Are All the U.S Dollars? 62

6 0 60

How Reliable Are the Money Data? 6 3 Summary 6 4 • Key Terms 65 • Questions and Problems 65 •

Web Exercises 66 • Web References 66

Financial Markets 67

CHAPTER 4

Measuring Interest Rates

Pre.senL Value

6 9 69 Application Simple Present Value 7l

Application How Much is That j ackpot Worthl

Four Types of Credit 1.farket Instruments Yield to MaLUrity

Application Yield to Maturity on a Simple Loan

Application Yield to Maturity and the Yearly Payment

on a fixed-Pay ment Loan

7 1

72

72 73

74

Application Yield to Maturity and the Bond Price for a Coupon Bond 76

Application Perpetuity

Global Negative T-Bill Rates l It Can Happen 7 9

The Distinction Between Interest Rates and Returns

MaLUrity and the Volatility of Bond ReLUrns: Interest-Rate Risk

FYI Helping Investors to Select Desired Interest-Rate Risk 8 3

Summary The Distinction Between Real and Nominal Interest Rates

Application Calculating Real Interest Rates

FYI With T I P S, Real Interest Rates Have Become Observable

in the United States 87 Summary 87 • Key Terms 87 • Questions and Problems 8 8

Web Exercises 8 8 Web References 8 9

78

HO

82

84 8 4 85

CHAPTER 5

Determinants of Asset Demand

Wealth Expccr.cd Returns Risk Liquidity Theory of Asset Demand Supply and Demand in the Bond Market

Demand Curve Supply Curve MarkeL Equilibrium Supply and Demand Analysis Changes in Equilibrium Interest Rates

Shifts in the Demand for Bonds Shifts in the Supply of Bonds Application Changes in the Interest Rate Due to Expected Inflation:

The fisher Effect

9 1

92 92 92 93

93 9 4

94

95

96

97 97

97

10 1

10 3 Application Changes in the Interest Rate Due to a Business Cycle Expansion 10 4 Application Explaining Low Japanese Interest Rates 10 6 Application Reading the Wall Street}ottntal "Credit Markets" Column

Following the Financial News The ''Credit Markets" Column 108

10 7

Supply and Demand in the Market for Money: The Liquidity Preference framework 1 0 9 Changes i n Equilibrium Interest Rates i n the Liquidity Preference framework 111

Application Changes in the Equilibrium Interest Rate Due to Changes

in Income, the Price Level, or the Money Supply 112

Application Money and Interest Rates 114 Docs a Higher Rate of Growth of the Money Supply Lower Inr.erest Rates?

Summary 119 • Key Terms 119 • Questions and Problems 119 •

Web Exercises 12 0 • Web References 12 1

127

127

128

Application Effects of the Bush Tax Cut and Its Possible Repeal

Following the Financial News Yield Curves 131

LiquidiLy Premium and Preferred HabiLat Theories 136

FYI The Yield Curve as a Forecasting Tool for Infiation and the Business Cycle I 4 1 Application Interpreting Yield Curves, 1980 -20 0 9 141 Summary 142 • Key Terms 143 • Questions and Problems 143 •

Web Exercises 144 • Web References 144

CHAPTER 7

The Stock Market, the Theory of Rational Expectations,

Computing the Price of Common Stock

The One-Period Valuation Model

The Generalized Dividend Valuation Model

The Gordon Growth Model

How the Market Sets Stock Prices

147 14H

149

149

150 Application Monetary Policy and Stock Prices 151 Application The Subprime Financial Crisis and the Stock Market 152

The Efficient Market Hypothesis: Rational Expectations in Financial Markets 155

Stronger Version of the Efficient "t-.,farkct Hypothesis 158 Application Practical Guide to Investing in the Stock Market 158 How Valuable Are Published Reports by lnvestmem Advisers? ISH

FYI Should You Hire an Ape as Your Investment Ad,iser7 16 0

Do Stock Prices Always Rise VVhen There Is Good News? 160 EITicienl Markel Prescription for lhc Investor 160 Application What Do the Black Monday Crash of 1987 and the Tech Crash

of 20 0 0 Tell U s About Rational Expectations and Efficient Markets' 16 1 Behavioral Finance

Summary 16 3 • Key Terms 16 4 • Questions and Problems 16 4 •

Web Exercises 165 Web References 165

162

PART 3 Financial Institutions 167

CHAPTER 8

Basic Facts about Financial Structure Throughout the World 16 9

How Transaction Casu:; Inl1uc:nce Financial StrucLure 172 How Financial lmermediaries Reduce Transacrion Costs 173 Asymmetric Information: Adverse Selection and :Vloral Hazard 17 4 The Lemons Problem: How Adverse Selection Influences Financial Structure 17 4 Lemons in the SLOck and Bond Markets

Tools to Help Solve Adverse Selection Problems

FYI The Enron Implosion 177

How Moral Hazard Affects the Choice Between Debt and Equity Contracts 1HO Moral Hazard in Equity Contracts: The Principal-Agem Problem 180 Tools w Help Solve the Princlpal-Agcm Problem 18 1 How Moral Hazard Influences Financial Structure in Debt Markets 1H3 Tools to Help Solve Moral Hazard in Debt Contracts 183

Application Financial Development and Economic Growth 186

FYI Should We Kill All the Lawyers> 18 8

Application Is China a Counter-Example to the Importance

of Financial Development> Conflicts of Interest

\VhaL Are Contlicrs of Interest and \Vhy Do \Ve Care?

Why Do Canllicts of Interest Arise>

What Has Been Dane to Remedy Canllicts of lnterestl

FYI The Demise of Arthur Andersen 192

FYI Credit-Rating Agencies and the Subprime Financial Crisis 19 3

FYI Has Sarbanes-Oxley Led to a Decline in U.S Capital :Vlarkets> 195

Summary 195 • Key Terms 19 6 • Questions and Problems 19 6 •

Web Exercises 197 • Web References 197

CHAPTER 9

188 18 9 190 190

192

Factors Causing Financial Crises 19 9

Dcr.erioration in Financial Institutions' Balance Sheets 201

Increases in UnccnainLy Increases in Inr.crcsr Rates

201

201

Dynamics of Past U.S Financial Crises 20 2

Application The Mother of all Financial Crises: The Great Depression 20 6 The Subprime Financial Crisis of 20 0 7-20 0 8 20 7 Financial Innovar.ions Emerge in r.hc "t-.·tortgagc tvtarkers 207

Global The Treasury Asset Relief Plan and Government Bailouts 21 2

Dynamics of Financial Crises in Emerging Market Economies

Stage One: Initiation of Financial Crisis

Stage Two: Currency Crisis

Sragc Three: Full-Fledged Financial Crisis

21 2

2 12 2 15 2 16 Application Financial Crises in Mexico, 1 994-1995; EastAsia,l997-1998;

Global The Perversion of the Financial Liberalization/Globalization Process 21 9

Summary 222 • Key Terms 222 • Questions and Problems 223 •

Web Exercise 223 • Web References 224

CHAPTER 10

The Bank Balance Sheet 225 LiabiliLics

Assets

Basic Banking

General Principles of Bank Management

Liyuidicy Management and the Role of Reserves

.'\.sseL Managc:menl

Liabilicy Management

Capital Adequacy 1.fanagemenr

Application Strategies for Managing Bank Capital

Application How a Capital Crunch Caused a Credit Crunch

in 20 0 8 · · · ·

Managing Credit Risk

Screening and 1.fonitoring

225

228 229 23 2

232

235

236

237 239

240 241

241

Loan Commitments Collateral and Compensating Balances Credit Rationing

Managing Interest- Rate Risk

Gap and Duration Analysis Application Strategies for Managing Interest-Rate Risk

Off- Balance- Sheet Activities

Loan Sales Generation of Fcc Income Trading Activities and Risk i'vlanagcmcm Techniques Global Barings, Daiwa, Sumitomo, and Societe Generate: Rogue Traders

and the Principal-Agent Problem 2 4 9 Summary 250 • Key Terms 251 • Questions and Problems 251 •

Web Exercises 252 • Web References 253

CHAPTER I I

Asymmetric Information and Financial Regulation

Government Safety Net

243

243

244

2 45 245 2 47

Is This a Good Thingl 257

Global Basel 2 How Well Will It Work? 2 62

Financial Supervision: Charlcring anJ Examination Assessment of Risk Management

Disclosure Requirements Consumer Protection

FYI Mark-to-:v!arket Accounting and the Subprime Financial Crisis 2 6 6

Restrictions o n Competition Summary

263 264 265

The 19 8 0s Sa\ings and Loan and Banking Crisis

Banking Crises Throughout the World

"Deja vu All Over Again"

Whither Financial Regulation After the Subprime Financial Crisis?

Increased Regulation of 1viongage Brokers Fewer Subprime tv1ortgage Products Regulation Compensation

2 7 1 2 7 3

273 275 - 276 276

276

Additional RcgulaLion of Privately Owned Govc:rnmem-Sponsored Enterprises 277 Heightened Regulation to Limit Financial Institutions' Risk Taking 2 77 Increased Regulation of Credit-Rating Agencies

Additional Regulation of Derivatives

The Danger of Overregulation

Summary 2 78 • Key Terms 2 78 Questions and Problems 2 78 •

Web Exercises 2 79 • Web References 2 7 9

CHAPTER 12

Historical Development of the Banking System

-r ,tultiplc Regulatory Agencies

Financial Innovation and the Growth of The "Shadow Banking System"

Responses ro Changes in Demand Conditions: lnr.crcsr.-Rar.c Volatility

ResponS('S w Changes in Supply Conclir.ions: Information Technology

FYI Will "Clicks" Dominate "Bricks" in the Banking Industry) 2 HH

Avoidance: of ExisLing Regulations

FYI Bruce Bent and the :Vloney :vlarket :vlutual Fund Panic of 2 0 0 8 2 9 1

Financial Innovation and the Decline of Traditional Banking

Structure of the U.S Commercial Banking Industry

289

292 2 9 5

296

297 Bank Consolidation and ;\! ationwide Banking 2 9 8 The Ricglc-Neal lnterstate Banking and Branching Efficiency Act of 1994

\Vhat \Vill rhe Structure of the U.S Banking Industry Look Like

in rhc Fmure?

Global Comparison of Banking Structure in the United States

and Abroad 30 1

Arc Bank Consolidation and Nationwide Banking Good Things?

Separation of the Banking and Other Financial Ser\ice Industries

Erosion of Glass-Sreaga11

The Gramm-Leach-Bliley Financial Services Modernization Act of 1999:

Repeal of Glass-Steagall

Implications for Financial Consolidation

Separation of Banking and Or.her Financial Services Industries Throughout

che World

FYI The Subprime Financial Crisis and the Demise of Large, Free- Standing

Investment Banks 30 4

Thrift Industry: Regulation and Strucwre

Savings and Loan Associations

tvtutual Savings Banks

PART 4

Global Ironic Birth of the Eurodollar Market 307

Structure of U.S Banking Overseas Foreign Banks in the United States

307 30H Summary 30 9 • Key Tenns 310 Questions and Problems 310

Web Exercises 311 • Web References 311

Central Banking and the

Conduct of Monetary Policy 313

CHAPTER 13

The Price Stability Goal and the :-.lominal Anchor

The Role of a N aminal Anchor The Time- lnconsisu::ncy Problem Other Goals of Monetary Policy

High Employment Economic Growth Stability of Financial t.farkets Interest-Rate Stability Stability in Foreign Exchange Markets Should Price Stability Be the Primary Goal of :Vlonetary Policy?

Price Stability as the Primary, long-Run Goal of MonNary Policy 320 Origins of the Federal Reserve System 32 0

Inside the Fed The Political Genius of the Founders of the Federal Reserve System 32 1 Structure of the Federal Reserve System

Federal Reserve Banks

322 323

Inside the Fed The Special Role of the Federal Reserve Bank of New York 32 4 Member Banks

Board of Governors of the Federal Reserve System

Inside the Fed The Role of the Research Staff 327

Federal Open Markel Commiuee (FOMC) The FOMC Meeting

Inside the Fed Green, Blue, and Beige: What Do These Colors

Mean at the Fed? 32 9 Why the Chairman of the Board of Governors Really Runs the Show How Independent is the Fedl

Inside the Fed How Bernanke's Style Differs from Greenspan's 331

Structure and Independence of the European Central Bank

Differences Between the European System of Cemral Banks and

325

326

32H 32H

330

330

333

Governing Council 334

Structure and Independence of Other Foreign Central Banks 335

Explaining Central Bank Behavior 33 7

Inside the Fed The Evolution of the Fed's Communication Strategy 338

Central Bank Independence and Macroeconomic Performance Throughout the World 34 1 Summary 34 1 • Key Terms 34 2 • Questions and Problems 34 2

Web Exercises 343 • Web References 343

CHAPTER 14

Three Players in the Money Supply Process

The Fed:S Balance Sheet

Liabilities

i\ssCls

Control of the :vlonetary Base

Federal Reserve Open Market Operations

Shifts from Deposits into Currency

Discount Loans

Other Factors That Affect the Monetary Base

Overview of the Feel's Ability to Comrol the Monetary Base

Multiple Deposit Creation: A Simple Model

Deposit Crcarion: The Single Bank

Deposit Creation: The Banking System

Deriving the Formula for T\.fultiplc Deposit Creation

Critique of the Simple Model

Factors that Determine the Money Supply

Changes in t.he Non borrowed Monetary Base, MB�

Changes in Borrowed Resenrcs, BR, from the Feel

Changes in Lhe Required Reserve Ralio, r

Changes in Currency Holdings

Changes in Excess Reserves

Overview of the Money Supply Process

The Money :v!ultiplier

Deriving the Money Multiplier

Inlllition Behind the Money Multiplier

Money Supply Response ro Changes in the Factors

Application The Great Depression Bank Panics, 193 0 -193 3

345 345 346

354

355 35H

359

36 0 360 360

Summary 36 9 • Key Terms 3 70 • Questions and Problems 3 70 •

Web Exercises 3 71 • Web References 3 72

CHAPTER 15

The Market for Reserves and the Federal Funds Rate

Demand and Supply in the Market for Reserves

37 3 373

Inside the Fed Why Does the Fed Need to Pay Interest on Reserves/ 375

How Changes in the Tools of Monetary Policy Allect the Federal Funds Rate Application How the Federal Reserve's Operating Procednres

Limit Flnctuations in the Federal Funds Rate Open Market Operations

A Day at the Trading Desk Advantages of Open Market Operations Discount Policy

Operation of the Discount \Vindow Lender of Last Resort

Inside the Fed Using Discount Policy to Prevent a Financial Panic 38 6

Inside the Fed Federal Reserve Lender-of- Last- Resort Facilities During

the Subprime Financial Crisis 3H7 Advantages and Disadvantages of Discount Policy Reserve Requirements

Disadvantages of Reserve Requiremcnt:s as a Policy Tool Monetary Policy Tools of the European Central Bank

Open Market Operations Lending to Banks Reserve Rcq uiremcnts Summary 39 I • Key Terms 39 1 Questions and Problems 392

Web Exercises 392 • Web References 39 3

CHAPTER 16

376

3 80 38 1 38 1

383 38 4

384

384

388 3H9

389 39 0 390 390

Inflation Targcr.ing in New Zealand, Canada, and the United Kingdom Advantages of Innar.ion Targeting

Disadvamagcs of Inflation Targeting Monetary Policy With an Implicit :-Jominal Anchor

399

399

39 9 400 402

403 405

PARTS

Disadvantages of the 'just Do It" Approach 406

Inside the Fed Chairman Bernanke and Inflation Targeting 407

Tactics: Choosing the Policy lnstnunent

Crircria for Choosing the Policy Instrument

Tactics: The Taylor Rule

Inside the Fed Fed Watchers 4 I 4

4 0 8 4 10 4 12

Central Banks' Response to Asset-Price Bubbles: Lessons from the Subprime Crisis 4 15 Two Types ofA.ssel-Price Bubbles

Should Ccmral Banks Respond to Bubbles' Should Monetary Policy Try to Prick Asset-Price Bubbles' Arc Other Types of Policy Responses Appropriate' Fed Policy Procedures: Historical Perspective

The Early Years: Discount Policy as the Primary Tool Discovery of Open 1.farkct Operations

The GreaL Depression

415

4 16

4 17 4 17 4 18

New Fed Operating Procedures: October 1979-0crobcr 1982 De-Emphasis of Monetary Aggregates: October 1982-Early 1990s Federal Funds Targeting Again: Early 1990s and Beyond Preemptive Strikes Against Infiation

Preemptive Strikes Against Economic Downturns and Financial Disruptions:

LTCM, Enron, ancl thc Subprime Meltdown lnH:'rnaLional Considerations

Summary 4 2 7 • Key Terms 4 28 • Questions and Problems 4 2 8

Web Exercises 42 9 • Web References 42 9

420 42 1

Foreign Exchange Market

\Vhat Arc Foreign Exchange Rates?

Following the Financial News Foreign Exchange Rates

\Vhy Arc Exchange Rates Important?

How Is Foreign Exchange Traded?

Exchange Rates in the Long Run

Law of One Price

435

433

434

436 436 437 437

Why the Theory of Purchasing Power Parity Cannot Fully Explain Exchange Rates 439 Factors That Affect Exchange Rates in the Long Run 439 Exchange Rates in the Short Run: A Supply and Demand Analysis 440 Supply Curve for Domestic A.sscts

Demand Curve for Domesr.ic Assets Equilibrium in the Foreign Exchange tvtarkct

Explaining Changes in Exchange Rates

ShifLS in the Demand for Domcsrk Asscrs Recap: Factors That Change the Exchange Rate Application Changes in the Equilibrium Exchange Rate: Two Examples

Changes in Interest Rates Changes in the 1 foncy Supply Exchange Rate Overshooting Application Why Are Exchange Rates So Volatile?

Application The Dollar and Interest Rates, 197 3 -20 0 8

Application The Subprime Crisis and the Dollar

Application Reading the Wall Street]oumal: The "Currency

442 442 443 443

443

446

448

448 449

450

452 452

454

Trading" Column 454

Following the Financial News The '·Currency Trading" Column 455

Summary 456 • Key Terms 456 • Questions and Problems 456

Web Exercises 457 • Web References 457

APPENDIX TO CHAPTER 17

Comparing Expected Returns on Domestic and Foreign Assets

Interest Parity Condition

CHAPTER 18

Intervention in the Foreign Exchange Market

Foreign Exchange Imcrvcmion and the t-,.,toncy Supply

Inside the Fed A Day at the Federal Reserve Bank of )lew York's

Foreign Exchange Desk 464 Unsterilizcd Inr.ervcntion

Global Why the Large U.S Current Account Deficit Worries Economists 4 6 9 Exchange Rate Regimes i n the International Financial System

Gold Standard The Bretton Woods System

Global The Euro's Challenge to the Dollar 47 1

470

470

470

PART 6

Application How Did China Accumulate Over $2 Trillion

Application The Foreign Exchange Crisis of September 1 992 477

Application Recent Foreign Exchange Crises in Emerging Market Countries:

Mexico 1 994, East Asia 1 997, Brazil 1 999, and Argentina 20 0 2 478 Capital Controls 4 8 0 Controls o n Capilal Oull1ows

Controls on Capilal Inflows The Role of the 1:11 F

Should the IMF Be an International Lender of Last Reson' How Should the lMF Operate'

Global The Subprime Financial Crisis and the l M F 484

480

480

4 H1

48 1 482

International Considerations and Monetary Policy 4 8 4 Direct Effects o f the Foreign Exchange Market o n the 1.foncy Supply 484

To Peg or Not to Peg: Exchange-Rate Targeting as an Alternative

'vVhcn Is Exchange-Rate Targeting Desirable for Industrialized Countries? 489

\Vhcn Is Exchange-Rate Targeting Desirable for Emerging 1\.farkct Coumrics? 489

Global Argentina's Currency Board 4 9 1

Summary 4 92 • Key Terms 4 9 3 • Questions and Problems 4 9 3 •

Web Exercises 4 9 4 • Web References 495

Monetary Theory 497

CHAPTER 19

Quantity Theory of :11oney

Velocity of Money and Equation of Exchange Quantity Theory

Quantity Theory of Money Demand

504

Spcculalivc tvloLive Putting the Three "tvlorivcs Together Further Developments in the Keynesian Approach

Transactions Demand Prccamionary Demand Speculative Demand Friedman's Modern Quantity Theol)' of Money

Distinguishing Between the Friedman and Keynesian Theories

Empirical Evidence on the Demand for Money

Interest Rates ancl 1-ioncy Demand Stability of 1 foney Demand Summary 516 • Key Tenns 517 Questions and Problems 517 •

Web Exercises 518 • Web References 518

CHAPTER 20

Determination of Aggregate Output

Consumer Expenditure and the Consumption Function lnvcsLmem Spending

FYI Meaning of the Word Investment 52 3

Equilibrium and the Keynesian Cross Diagram Expenuilllre Multiplier

504

505

507

507 509 509 511

Role of Inrcrnarional Trade Summary of Lhe DL'lmninanls of AggregaLe Oulpul The lSLM Model

Equilibrium in Lhe Goods Markel: The IS Curve Equilibrium in Lhe MarkeL for Money: The LM Curve

ISLM Approach to Aggregate Output and Interest Rates

Summary 541 • Key Terms 541 • Questions and Problems 541 •

Web Exercises 542 • Web References 542

537

539

Changes in Equilibrium Level of the Interest Rate and Aggregate Output 548 Response to a Change in "tvloncr.ary Policy

Response Lo a Change in Fiscal Policy Application The Economic Stimulus Act of 20 0 8

Effectiveness of Monetary Versus Fiscal Policy

548

549

Monetary Policy Versus Fiscal Policy: The Case of Complete Crowding Out

550 552 552 Application Targeting Money Supply Versus Interest Rates 554

ISLM Model in the Long Run

ISLM Model and the Aggregate Demand Curve

Deriving the Aggregate Demand Curve

Factors That Cause the Aggregate Demand Curve to Shift

Summary 563 • Key Terms 563 • Questions and Problems 563

Web Exercises 564 • Web References 564

CHAPTER 22

557 559

560

56 1

Following the Financial News Aggregate Output, Unemploymem,

and the Price Level 566 Deriving the Aggregate Demand Curve

Factors That Shift the Aggregate Demand Curve

Aggregate Supply

Long-Run Aggregate Supply Curve

Short-Run Aggregate Supply Curve

Shifts in the Short-Run Aggregate Supply Curve

Factors That Shift the Short-Run Aggregate Supply Curve

Equilibrium in Aggregate Supply and Demand Analysis

Equilibrium in the Shan Run

Equilibrium in the Long Run

Changes in Equilibrium Caused by Aggregate Demand Shocks

Changes in Equilibrium Caused by Aggregate Supply Shocks

Shifts in the Long-Run Aggregate Supply Curve: Real Business Cycle Theory

and Hyslcresis

Conclusions

Application Explaining Past Business Cycle Episodes

Viemam War Buildup, 1964-1970

Negative Supply Shocks, 1973-1975 and 1978-1980

Favorable Supply Shocks, 1995-1999

Negative Demand Shocks, 2001-2004

The Perfect Storm of 2007-2008: Negative Supply Shocks and the Subprime

Financial Crisis

Summary 584 • Key Terms 584 • Questions and Problems 585 •

Web Exercises 5HS • Web References 5H6

CHAPTER 23

566

567 56H 56H

570

57 1

57 1 574 574

58 1

582

582

583

FYI Perils of Ignoring an Outside Dri,ing Factor:

How to Lose a Presidential Election 59 1

Application The Debate on the Importance of Monetary Policy

to Economic Fluctuations Early Keynesian Evidence on the Importance of Mone;

Objections ro Early Keynesian Evidence Early Monerarisr Evidence on r.hc lmponance of 1 foncy Ovcrvit\\' of Lhc 1v1oneLarisl Evidence

.591

59 1 592 594

599

FYI Real Business Cycle Theory and the Debate on :vloney and Economic Activity 6 0 0 Transmission Mechanisms o f Monetary Policy 6 0 0

Credit View

FYI Consumers' Balance Sheets and the Great Depression 6 0 8

Why Arc Credit Channels Ukcly t o B e Important' Application The Subprime Recession

Lessons for Monetary Policy

605

609

6 0 9

6 10 Application Applying the Monetary Policy Lessons to j apan 6 12 Summary 6 13 • Key Terms 6 13 • Questions and Problems 6 14 •

Web Exercises 6 14 • Web References 6 15

CHAPTER 24

Money and Inflation: Evidence

German Hyperinnarion, 192 1- 1923 Recent Episodes of Rapid lnnarion Meaning of Inflation

Views of In tlation

How t-,.,foncy Growth Produces lnfiation Can Other Factors Besides i\,foncy Growth Produce a Sustained Infiation?

Summary Origins of Inflationary :vlonetary Policy

High Employment Targets and InOar.ion Budget Deficits and Inflation Application Explaining the Rise in U.S In!1ation, 196 0 -1980

The Discretionary f:\1 ondiscretionary Policy Debate

Responses ro High Unemployment Discrcrionary and Nondiscretionary Positions Expccrations and rhe Discrerionary/Nondiscrerionary Debate Di.screlionary Versus Nomliscrclionary: Conclusions Application Importance of Credibility to Volcker's Victory

6 17 6 18 6 18

6 34

635

636

637 63H

Over Inflation 6 3 9 Summary 6 4 0 • Key Terms 6 4 0 • Questions and Problems 6 4 0 •

Web Exercises 641 Web References 6 4 1

CHAPTER 25

The Lucas Critique of Policy Evaluation 644 Econometric Policy Evaluation

Example: The Term Structure of Interest Rates

New Classical Macroeconomic Model

Effects of Unamicipatecl and Anticipated Policy

FYI Proof of the Policy Ineffectiveness Proposition 6 4 8

Can a n Expansionary Policy Lead t o a Decline i n Aggregate Output?

Implications for Policy makers

New Keynesian Model

EITects of Unanticipated and Anticipated Policy

Implications for Policy makers

Comparison of the Two )Jew Models With the Traditional Model

Short-Run OULpllL and Price Responses

Stabilization Policy

Ami-inflation Policies

Credibility in Fighting Inflation

644 644 645 646

648

649 650

65 1 653

Web Exercises 664 • Web References 664

Glossary G· I Credits C· I Index 1· I

P REF A CE

H ALLM A R KS

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 eight editions:

• A unifying, analytic framework that uses a few basic economic principles Lo orga­nize students' thinking about the strucwre of financial markets, the foreign exchange markets, financial institution management, and the role of monetary pol­icy in the economy

• A careful, step-by-step developmem of models (an approach found in the best prin­ciples of economics textbooks), which makes iL easier for srudems Lo learn

• The complete imegrarion of an imernarional perspective throughout the text

A thoroughly up-to-date treatment of the latest developments in monetary theory Special features called "Following the Financial News" and "Reading the Wall Street Journal" Lo 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

W H AT'S N EW I N TH E N I NTH E D I TI O N

In addition to the expected updating o f all data through the end o f 2008 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

Lo cover, The Economics of Money, Banking, and Financial Markets, Business School Edi­tion (formerly the Alternate Edition), is designed for those professors who prefer to focus more on finance, or who simply do not cover /SL\1 The Business School Edition includes nor only chapters on nonbank finance and financial derivatives, bur also an emire chapter on the conflicts of interest in the financial industry The Business School Edition omits the Lwo ISL\!f chapters and the chapter on the implications of rational expectations for policy For those professors whose courses have less of an emphasis on monetary theory., The Economics of Money, Banhing, and Financial Markets, Business School Edition, will more closely fir your needs

for those professors who wam a comprehenslve dlscussion of monetary theory and monetary policy, The Economics of Money, Banhing, and Financial Marhets, Ninth Edition, contains all of the chapters on monetary theory Professors who do want this coverage are often hard-pressed to cover all rhe finance and institutions chapters To that end, the

xxix

Ninth Edition omits the chapters on nonbank finance, financial derivatives, and con­flicts of interest The MyEconLab course for each edition provides the omitted chapters making them readily available for those who do wish to utilize them in their courses The Subprime Financial Crisis

The subprime financial crisis has led to a series of events that have completely changed the structure of the financial system and the way central banks operate This has required a rewriting of almost the entire textbook, including a new chapter, a rewrite of one whole chapter, and the addition of many timely new sections, applications, and boxes throughout the rest of the book

New Chapter 9: Financial Crises and the Subprime Meltdown With the coming of the subprime financial crisis, a money and banking course would not be complete without an extensive analysis of why financial crises like the subprime crisis occur and why they have such devastating effects on the economy Using an eco­nomic analysis of the effects of asymmetric information on financial markets and the economy, this new chapter examines why financial crises occur and why they have such devastating effects on the economy This analysis is used to explain the course of events

in a number of past financial crises throughout the world, with a particular focus on explaining the recent subprime crisis Because the recent events in the sub prime crisis have been so dramatic, the material in this chapter is very exciting for students Indeed, when teaching this chapter after I returned to Columbia, the students were more engaged with this material than with anything else I have taught in my entire teaching career of over 30 years

Reordering of Part 3 , Financial Institutions, and Rewrite of Chapter 1 1 , The Economic Analysis of Financial Regulation

In past editions, the chapter on the structure of the banking industry was followed by the chapter on banking regulation This ordering no longer makes sense in the after­math of the sub prime financial crisis, because nonbank financial institutions like invest­ment banks have for the most part disappeared as free-standing institutions and are now part of banking organizations To reflect the new financial world that we have entered, we first discuss the financial industry as a whole and then look at the specifics

of how the now more broadly based banking industry is structured To do this, I have placed the chapter on regulation before the chapter on the structure of the banking industry and have rewritten it to focus less on bank regulation and more on regulation

of the overall financial system

Compelling New Material Throughout the Text The subprime financial crisis has had such far-reaching effects on the field of money and banking that almost every chapter has required changes to reflect what has happened Throughout the book, I have also added a large amount of substantive new material on the impact of the subprime financial crisis including

• A new application on the subprime collapse and the Baa-Treasury spread (Chapter 5)

• A new applicarion on rhe sub prime financial crisis and rhe sLOck marker (ChapLer 7)

• A new box on credit-rating agencies and rhe subprime financial crisis (Chapter 8)

A new application on how a capital crunch caused a credit crunch in 2008 (Chapter 10)

A new box on mark-to-market accounting and the subprime financial crisis (Chaprer l l)

• A new box on rhe subprime mongage crisis and consumer protecLion regulation (Chapter l l)

A new section on where financial regulation is heading after the subprime financial crisis (Chaprer 1 1)

• A new box on the money market murual fund panic of 2008 (Chaprer 12)

• A new box on the subprime financial crisis and the demise of large, free-standing investment banks (Chapter 12)

A new Inside the Fed box on Federal Reserve lender-of-last-resort facilities during the subprime financial crisis (Chapter Jj)

• A new section on preemptive srrikes against economic downturns and financial dis­ruption during the snbprime meltdown (Chapter 1 6)

A new section on lessons from the subprime crisis as to how central banks should respond to asseL price bubbles (Chapter 16)

• A new application on the sub prime crisis and the dollar (Chapter 1 7)

• A new box on the subprime financial crisis and the IMF (Chapter 18)

A new application on the Economic Stimulus Act of 2008 (Chapter 21)

• A new application on the perfect storm of shocks: negative supply shocks and the subprime financial crisis (Chaprer 22)

• A new application on the sub prime recession (Chapter 23)

A new box on the AIG blowup (Web Chapter 1)

• A new box on the subprime financial crisis and the monoline insurers (Web Chapter 1 )

• A new box o n the subprime financial crisis and the bailout of Fannie Mae and Freddie Mac (Web Chapter l)

A new application on lessons from the subprime financial crisis: when are financial derivatives likely to be a worldwide time bombl (Web Chapter 2)

Additional New Material on Financial Markets

and Institutions

There have also been changes in financial markets and instilltLions in recent years that have not been directly related to the subprime financial crisis, and I have added the fol­lowing new material LO keep rhe LexL current:

A new section on the positive role that lawyers play in our financial system, enti­tled "Should We Kill All the Lawyers?" (Chapter 8)

• A new box on whether Sarbanes-Oxley led Lo a decline in U.S capiral markers (Chaprer 8)

A new box on how well Basel 2 will work (Chapter l l )

A rewritten section o n financial innovation and the growth o f the "shadow banking system" (Chapter 12)

• A new secLion on credir insurance (Web ChapLet 1)

• A new secLion on privare equiry and vemure capiral funds (Web Chaprer 1)

A new box on sovereign wealth funds and whether they pose a danger (Web Chapter 1)

New Material on Monetary Theory and Policy Drawing on my two years as a governor of the Federal Reserve, I have added new mate­rial on monetary theory and policy over and above that which was related to the sub­prime financial crisis:

A new Inside the Fed box on how Bernanke's style differs from Greenspan$ (Chapter 13)

• A rewritten Inside the Fed box on the evolmion of the Fed:S communication strat­egy (Chapter 13)

• A new Inside the Fed box on why the Fed needs Lo pay interest on reserves (Chapter 15)

A rewrite of the section on the market for reserves and the federal funds rate to reGect the new policy of paying interest on reserves (Chapter 15)

• A new application on how the Federal Reserve's operating procedures limit Gucw­ations in the federal funds rate (Chapter 1 5)

• An update on the Inside the Fed box on Chairman Bernanke and inGation target­ing (Chapter 1 6)

• A expanded discussion of the Taylor Rule (Chapter 16)

• A new section on preemptive strikes against inGation (Chapter 16)

A new section on preemptive strikes against economic downturns and financial dis­ruptions (Chapter 1 6)

Further Simplification of the Supply and Demand Analysis of the Foreign Exchange Market

The chapter on the determination of exchange rates has always been challenging for some students In the Eighth Edition, I moved the analysis closer to a more traditional supply and demand analysis to make it more intuitive for students Although this change has been very well received by instructors, I decided that the model of exchange rate determination could be made even easier for the students if I relegated the calcula­tion comparing expected returns and the interest parity conditions to an appendix Doing so in the Ninth Edition simplifies discussion appreciably and should make the analysis of exchange rate determination much more accessible to students

Improved Exposition and Organization Helpful comments from reviewers prompted me to improve the exposition throughout the book The reviewers convinced me that material on what cemral banks should do would be better placed at the beginning of the discussion of Pan 4 on central banking

As a result, I moved the material on the goals of monetary policy from Chapter 1 6 , which now has a slightly new Litle, "The Conduct of Monetary Policy: Strategy and Tactics" to Chapter 1 3 , "Central Banks and the Federal Reserve System," which also has

a slight change in title

Reviewers also suggested that I could simplify and condense the discussion of how the money supply is determined by combining Chapters l 3 and 14 from the Eighth Edi­tion into a new chapter The resulting new chapter entitled "The Money Supply Process" does not lose any comem and works even bmer in the classroom than the two chapters

in the Eighth Edition Also, at the suggestion of several reviewers, I simplified the expo­sition at the beginning of Chapter 22 of how the aggregate demand curve is derived

F LEXI B I LITY

Chapters and Appendices on the Web The Web site for the book, www.pearsonhighered.com/mishkin, is an essential resource for additional content

The Web chapters for the Ninth Edition of The Economics oj Money, Banking, and Financial Markets include the unique chapters from the Business School Edition These chapters are:

Web Chapter 1 : Nonbank Finance

Financial Derivatives Web Chapter 2 :

Web Chapter 3 : ConOicLS o f Interest in the Financial Industry The Web appendices include:

Chapter 4:

Chapter 5 : Chapter 5 : Chapter 5 : Chapter 7 : Chapter 1 0 : Chapter 1 0 : Chapter 1 1 : Chapter 1 1 : Chapter 14:

Measuring Bank Performance The Savings and Loan Crisis and Its Aftermath Banking Crises Throughout the World The Fed's Balance Sheet and the Monetary Base The M2 Money Multiplier

Explaining the Behavior of the Currency Ratio

A Mathematical Treatment of the Baumol-Tobin and Tobin Mean Variance Model

Chapter 1 9 : Empirical Evidence on the Demand for Money Chapter 2 1 : Algebra of the fSLM Model

Chapter 22: Aggregate Supply and the Phillips Curve Instructors can either use these Web Chapters or appendices in class to supplemem the material in the textbook or recommend them to students who want to expand their knowledge of the money and banking field

In using previous editions, adopters, reviewers, and survey respondents have cominu­ally 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 LexL achieves flexibility as follows:

Core chapters provide the basic analysis used throughout the book, and other chap­ters or sections of chapters can be used or omitted according to instructor preferences For example, Chapter 2 imroduces the financial system and basic concepts such as transaction costs, adverse selection, and moral hazard After covering Chapter 2 , the instructor may decide L O give more detailed coverage of financial strucLUre by

assigning Chapter 8, or may choose to skip Chapter 8 and take any of a number of different paths through the book

• The text also allows instructors to cover the most imponant issues in monetary the­ory and policy without having to use the ISL\1 model in Chapters 20 and 2 l , while more complete treatments of monetary theory make use of the ISL\1 chapters

• The internationalization of the text through marked international sections within chapters, as well as through complete separate chapters on the foreign exchange market and the international monetary system, is comprehensive yet flexible Although many instructors will teach all the international material, others will not Instructors who want less emphasis on international topics can easily skip Chapter

17 on the foreign exchange market and Chapter 18 on the international financial system and monetary policy The international sections within chapters are self­contained and can be omitted with little loss of continuity

To illustrate how this book can be used for courses with varying emphases, several course outlines are suggested for a semester teaching schedule More detailed informa­tion about how the text can be used flexibly in your course is available in the Instruc­tor's Manual

General Money and Banking Course Chapters 1-5 , 1 0 13, 1 5 , 1 6 , 22, 24, with a choice of 6 of the remaining 12 chapters

• General Money and Banking Course wilh an International Empha_sis: Chapters 1-5, 10-13 , 1 5-18, 22, 24 with a choice of 4 of the remaining 10 chapters

• Financial Marilets and Institutions Cow·se: Chapters 1-l 2 , with a choice of 7 of the remaining l3 chapters

• Monelaty Theory and Policy Course: Chapters 1-5, 13-16 , 1 9 , 22-25, with a choice

of 5 of the remaining ll chapters

P E DAG O G I CAL AI DS

In teaching theory or its applications, a textbook must be a solid motivational tool To this end, I have incorporated a wide variety of pedagogical features to make the mater­ial easy to learn:

1 Previews at the beginning of each chapter tell students where the chapter is head­ing, why specific topics are important, and how they relate to other topics in the book

2 Applications, numbering around 50, demonstrate how the analysis in the book can be used to explain many imponam real-world situations A special set of appli­cations, called "Reading the Wall Street journal," shows students how to read daily columns in this leading financial newspaper

3 Following the Financial News boxes introduce students to relevant news articles and data that are reponed daily in the press and explain how to read them

4 Inside the Fed boxes give students a feel for what is important in the operation and structure of the Federal Reserve System

5 Global boxes include interesting material with an international focus

6 FYI boxes highlight dramatic historical episodes, imeresting ideas, and imriguing facts related to the subject matter

7 Summary tables provide a useful study aid in reviewing material

8 Key statements are important points set in boldface italic type so that students can easily find them for later reference

9 Graphs with captions, numbering more than 150, help students clearly understand the interrelationship of the variables plotted and the principles of analysis

10 Summary at the end of each chapter lists the main points covered

l l Key terms are imponam words or phrases, boldface when they are defined for the first time and listed by page number at the end of the chapter

1 2 End-of-chapter questions and problems, numbering more than 400, help stu­dents learn the subject matter by applying economic concepts, including a special class of problems that students find particularly relevam, under the heading "Using Economic Analysis to Predict the Future."

1 3 Web Exercises encourage students to collect information from online sources or use online resources to enhance their learning experience

14 Web Sources report the Web URL source of the data used to create the many tables and charts

15 Web References point the student to Web sites that provide information or data that supplement the text material

16 Glossary at the back of the book provides definitions of all the key terms

AN EAS I E R WAY TO TEACH : S U P P L E M E NTS

TO ACCO M PANY TH E N I NTH E D I TI O N

The Economics of Money, Banhing, and Financial Marluts, Ninth Edition, includes the most comprehensive program of supplements of any money, banking, and financial markets textbook These items are available to qualified domestic adopters but in some cases may not be available to international adopters

MyEconLab is the premier online assessment and tutorial system, pairing rich online content with innovative learning tools The MyEconLab course for the Nimh Edition of The Economics oJ Money, Banking, and Financial Markets includes all end-of-chapter prob­lems from the text, which can be easily assigned and automatically graded

Students and MyEconLab This online homework and tutorial system puts stu­dents in control of their own learning through a suite of study and practice tools corre­lated with the online, imeractive version of the textbook and other media tools Within MyEconLab's structured environment, students practice what they learn, test their understanding, and then pursue a study plan that MyEconLab generates for them based

on their performance on practice tests

Instructors and MyEconlab MyEconLab provides flexible tools that allow instructors to easily and effectively customize online course materials to suit their needs Instructors can create and assign tests, quizzes, or homework assignments MyEconLab

saves time by automatically grading all questions and tracking results in an online grade book MyEconLab can even grade assignments that require students to draw a graph After registering for MyEconLab, instructors have access to downloadable supple­ments such as an instructors manual, Power Point lecture notes, and the test bank The test bank can also be used within MyEconLab, giving instructors ample material from which they can create assignmems

Additional MyEconLab features include:

• Animated Figures Key figures from the textbook are presemed in step-by-step ani­mations with audio explanations of the action

Applications The applications from the text are available with assignable questions

• Mishkin Inlerviewed on the financial Crisis Watch video foOLage from a recent imer­view with the author, complete with assignable questions

Weehly News Updates Each week, a relevant and current article from a newspaper

or journal is posted with Discussion Questions

Resecmh Navigator (CourseCompass version only) Extensive help on the research process and four exclusive databases of accredited and reliable source material including the Financial Times and peer-reviewed journals

for more information and to register, please visit www.myeconlab.com

Additional Instructor Resonrces

I Instructor's Manual, a print supplement prepared by me and offering conventional elements such as sample course outlines, chapter outlines, and answers to ques­tions and problems in the text

2 PowerPoint® Slides New to this edition is a far more comprehensive set of Power Point slides-greatly expanded from the previous edition and now number­ing over 550-that provides not only all the tables and graphs in the text, but very detailed lecture notes for all the material in the course The basis of the lecwre notes is, in fact, the notes I use in class-and they should help other instructors prepare their lectures as they have helped me In this edition, Martin Pereyra of the University of Missouri has enhanced the presentation by adding additional lecture notes Some instructors might use these Power Point slides as their own class notes and prefer Lo Leach with a blackboard But for those who prefer to Leach with visual aids, the PowerPoim slides, which are fully customizable, afford the flexibility Lo take this approach

3 Printed Test Bank updated and revised by Richard G Stahl of Louisiana State University and Kathy Kelly of the University of Texas at Arlington, comprising more than 2,jQO multiple-choice and essay test items, many with graphs

4 Computerized Test Bank, allowing the instructor to produce exams efficiemly This product consists of the multiple-choice and essay questions in the printed Test Bank and offers editing capabilities It is available in Windows and Macintosh versions

5 Instructor's Resource CD-ROM This edition of the book comes with a powerful teaching tool: an Instructors Resource CD-ROM fully compatible with Windows and Macintosh computers, the CD-ROM contains Word and PDF files for the entire contents of the Tnstructors Manual, PowerPoint presentations, Computerized Test Bank files, and Word and PDF files of the Test Bank Using this supplement, instructors can prepare student handouts such as solutions to problem sets made from end-of-chapter problems or the outline of the lecture of the day I have used

handouts of this type in my classes and have found them to be very effective The Computerized Test Bank software (TestGen for Windows and Macintosh) is a valu­able test preparation tool that allows professors to view, edit, and add questions Instructors have our permission-and are encouraged-to reproduce all of the materials on the CD-ROM and use them as they see fit in class

6 Mishkin Web site, located at www.pearsonhighered.com/mishkin, which fea­tures appendices on a wide variety of topics (see "Appendices on the Web"), omit­ted chapters, and links to the URLs that appear at the end of the chapters

Additional Stndent Resonrces

l Study Guide, fully revised and updated by David Hakes of the University of Northern Iowa and Ed Gamber of Lafayette College, includes chapter synopses and completions, exercises, self-tests, and answers to the exercises and self-tests

2 Readings on Money, Banking, and Financial Markets, edited by james W Eaton

of Bridgewater College and me, updated annually, with over half the articles new each year to enable instructors to keep the content of their course current through­out the life of an edition of the text The readings are available within MyEconLab

ACKN OW LE D G M E N TS

As always in so large a project, there are many people to thank My gratitude goes espe­cially to Donna Battista, economics and finance editor-in-chief at Pearson and Rebecca Ferris-Caruso, my development editor I would also like to thank Noel Seibert, Kathryn Dinovo, and Kerri McQueen for their contributions as well I also have been assisted by comments from my colleagues at Columbia and from my swdents

In addition, I have been guided by the thoughtful commentary of outside review­ers and correspondents, especially Jim Eaton Their feedback has made this a better book In particular, 1 thank the following:

Burt Abrams, University of Delaware Stefania Albanesi, Columbia University Mike Carew, Barauch University Tina Carter, University of Florida lmran Farooqi, University of lowa Shirley Gedeon, University of Vermont Lance Girton, University of Utah Ralph Gunderson, University of Wisconsin Scott Hein, Texas Tech

Chad Hogan, University of Michigan james Hueng, Western Michigan Ahmed Kalifa, Colorado State University Elham Mafi-Kreft, Indiana University james Maloy, University of Pittsburgh Carrie Meyer, George Mason University Steve Russell, lUPUl

joe Santos, South Dakota State University

john Shea, University of Maryland Rajesh Singh, Iowa State University Aditi Thapar, New York University Chao Wei, George Washing University Elliot Willman, New Mexico State University jaejoon Woo , DePaul University

Ed Zajicek, Winston Salem State University

My special thanks go LO the following individuals who analyzed the manuscript in previous editions:

Francis W Ahking, University of Connecticut Mohammed Akacem, Metropolitan State College of Denver Muhammad Anwar, University of Massachusetts Harjit K Arora, Le Mayne College

Stacie Beck, University of Delaware Gerry Bialka, University of North Florida Daniel K Biederman, University of Nonh Dakota john Bishop, East Carolina University

Daniel Blake, California State University, Northridge Robert Boatler, Texas Christian University Henning Bohn, University of California, Santa Barbara Michael W Brandl, University of Texas at Austin Oscar T Brookins, Northeastern University William Walter Brown, California State University, Northridge james L Butkiewicz, University of Delaware

Colleen M Callahan, Lehigh University Ray Camerbery, Florida State University Sergio Castello, University of Mobile jen-Chi Cheng, Wichita State University Patrick Crowley, Middlebury College Sarah E Culver, University of Alabama, Birmingham Maria Davis, San Antonio College

Ranjit S Dighe, State University of New York, Oswego Richard Douglas, Bowling Green University Donald H Dutkowsky, Syracuse University Richard Eichhorn, Colorado State University Paul Emberton, Southwest Texas State University Erick Eschker, Humboldt State University Robert Eyler, Sonoma State University

L S Fan, Colorado State University Sasan Fayazmanesh, California State University, Fresno Dennis Fixler, George Washington University Gary Fleming, Roanoke College

Grant D Forsyth, Eastern Washington University Timothy Fuerst, Bowling Green State University James Gale, Michigan Technological University Stuart M Glosser, University of Wisconsin, Whitewater Fred C Graham, American University

Jo Anna Gray, University of Oregon David Gulley, Bentley College

Daniel Haak, Stanford University

Larbi Hammami, McGill University

Bassan Harik, Western Michigan University

] C Hartline, Rutgers University

Robert Stanley Herren, North Dakota State University

Jane Himarios, University of Texas, Arlington

Linda Hooks, Washington and Lee University

Dar-Yeh Hwang, National Taiwan University

Jayvanth lshwaran, Stephen F Austin State University

Jonatan Jelen, Queens College and City College of CUNY

U Jin Jhun, State University of New York, Oswego

Frederick L Joutz, George Washington University

Bryce Kanago, University of Northern Iowa

Magda Kandil, International Monetary Fund

Theodore Kariotis, Towson University

George G Kaufman, Loyola University Chicago

Richard H Keehn, University of Wisconsin, Parkside

Elizabeth Sawyer Kelly, University of Wisconsin, Madison

Fritz Laux, Northeastern State University

Jim Lee, Fort Hays State University

Robert Leeson, University of Western Ontario

Tony Lima, California State University, Hayward

Fiona Maclachlan, Manhattan College

Bernard Malamud, University of Nevada, Las Vegas

James Marchand, Mercer University

Marvin Margolis, Millersville University

Elaine McBeth, College of William and Mary

Stephen McCafferty, Ohio State University

James McCown, Ohio State University

Cheryl McGaughey, Angelo State University

W Douglas McMillin, Louisiana State University

William Merrill, Iowa State University

Stephen M Miller, University of Connecticut

Masoud Moghaddam, Saint Cloud State University

Thomas S Mondschean, DePaul University

Clair Morris, U.S Naval Academy

Jon Nadenichek, California State University, Northridge

John Nader, Grand Valley State University

Leonce Ndikumana, University of Massachusetts, Amherst

Ray Nelson, Brigham Young University

lnder P Nijhawan, Fayetteville State University

Nick Noble, Miami University of Ohio

Dennis O'Toole, Virginia Commonwealth University

Mark ] Perry, University of Michigan, Flint

Chung Pham, University of New Mexico

Marvin M Phaup, George Washington University

Ganga P Ramdas, Lincoln University

Ronald A Ratti, University of Missouri, Columbia

Hans Rau, Ball State University

Prosper Raynold, Miami University

)mer Reyes Texas A&M Cni\miry jackRuss,ian Die�xSrarc CnimsiJy Rol:cn S Rycroil Mary Washington CollCJ\C lj�n ichnudcr, 1ubum Cnimsi!y \lontg•xnny Walrer S�hwarrr Colorado imc Cnimsiry Hannder Sm�h Grand \hllcv Stare Cnimsirv larry Tavlor lelu�hCnilmiry

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Ky H Yuhn Flonda \ilaneie Cni>e�iry jrffrev Zrmmerman, \lethodi� College