economics_of_money_banking__financial_markets

Index I-11

ISLM model, 568, 571, 575–580

Keynesian cross diagram, equilib-

aggregate demand curve,

rium in, 540

577–580

Keynesian evidence, 607–610

aggregate output, 557–558

Keynesian framework, 536

interest rates, 557–558

aggregate output, 536–551

Keynesian framework, 551–558

ISLM model, 551–558

Italy

Keynesian model, new, 665–666

EMS, 474

Keynesian structural models, 605

euro, 49

Krugman, Paul, 467

Kydland, Finn, 388

Jackson, Andrew, 230

January effect, 155–156

Labor market, tightness of, 594

Japan

Lakonishok, J., 158

banking crises, 282–284

Large, complex, banking organiza-

banking systems, 252

tions (LCBOs), 248

Bank of Japan, 350

Large-denomination time deposits,

Dai-Ichi Kangyo Bank, 256

53, 203

financial regulation, 40

Latin America, banking crises,

Fuji Bank, 256

281–282

interest rates, 103

Law of one price, 439

internationalization of financial

LCBOs (large, complex, banking

markets, 29

organizations), 248

monetary policy, 628

Leeson, Nick, 225

monetary targeting, 497

Legislative lag, 651

negative T-bill rates, 69

Lemons problem, 175–180

Jegadeesh, N., 158

Lender of last resort, 402

Jensen, Michael C., 154

Lending, specialization in, 218. See

Jobs

also banks; loans

effect of dollar value fluctuations, 7

Leverage ratio, 265

unemployment rates, 9. See also

Liabilities, 24

unemployment

balance sheets, 201–204

Junk bonds, 124, 235–236

costs, 240–241

Federal Reserve System, 464

Kandel, Shumuel, 157

management, 208, 212–213

Kane, Edward, 275

Life cycles, Gordon growth model,

Kansas City Board of Trade, 315

143

Karjalainen, R., 155

Life insurance, 287–288

Keogh plans, 294

Life insurance companies, 36

Keynes, John Maynard, 521

Limits of insurance, 292

Keynesian approach

Limits on competition, 40

aggregate demand curve,

Liquidity, 27, 47

582–587

bonds, 96, 125

comparing to Friedman,

equilibrium in interest rates,

530–532

96–97

developments in, 524–528

expectations theory, 134

inflation, 636

household liquidity effects, 623

I-12 Index

Liquidity (continued)

Marked to market, 318

interest rates, 86, 104–117

Market equilibrium, federal funds

management, 208

rate, 395

preference analysis, 112–117,

Market fundamentals, 152

555

Market interest rates, money multi-

services, 31

plier, 380

Liquidity preference framework

Markets. See also Financial markets

interest rates, 107–117

Black Monday Crash of 1987,

money markets, 105–107

163–164

Liquidity preference theory,

capital, 27

521–524

debt. See debt

Liquidity premium theory, 133

efficient market hypothesis, 149,

Lloyd’s of London, 290. See also

150–152, 153–162

insurance companies

equilibrium, 90

LM curve, 551, 556, 564–566

Eurodollar, 255

shifts in, 579–580

exchanges, 27

Load mutual funds, 299

foreign stock market indexes, 30

Loanable funds framework, 91–92

futures, 311–320

Loans, 8, 169. See also banks; finan-

lemons problem, 175–180

cial institutions

liquidity preference framework,

commitments, 219

105–107

discount, 203

money, 27

finance companies. See finance

OTC, 27

companies

overreaction, 157

fixed-payment, 63, 65

price-level effect, 108

function of financial markets,

primary markets, 26

23–25

rational expectations, 162–164

highly leveraged transaction

reserves, 393–398

loans, 274

secondary markets, 26

money supply, 364

securities operations, 302–306

moral hazards, 32–33

segmented markets theory, 132

profitability, 205

setting security prices, 144–147

sales, 223

stability, 413–414

securitization, 237–238

supply and demand, 87–93

simple, 62, 63, 64–65

technical analysis, 155

transaction costs, 30

theory of efficient capital mar-

yield to maturity, 64

kets, 149

London International Financial

Martin Jr., William McChesney,

Futures Exchange, 317

423

Long positions, 309

MasterCard, 51, 234

Long-run aggregate supply curve,

Matched sale-purchase transactions,

590

400

Long-run monetary neutrality,

Maturity

576

of bonds, 129. See also bonds

Long-term banking customer rela-

dates, 62

tionships, 218

of debt, 26

Index I-13

comparison of types, 666–676

Quantity Theory of Money: A

Federal Reserve System proce-

Restatement, The, 528–532

dures, 419–428

real money balances, 523

goals of, 411–414

reliability of data, 55–56

implications for, 658

seignorage, 493

inflation, 638–650

transaction costs, 29–30

international, 427, 482–483

velocity of, 518, 520–521, 582

Lucas critique of policy evalua-

Money center banks, 212

tion, 659–660

Money market deposit accounts

new classical macroeconomic

(MMDAs), 202

model, 660–665

Money market mutual funds, 37,

nominal anchor, 509–511

52–53, 238–239, 299. See also

Phillips curve, 429–430

financial intermediaries

rational expectations revolution,

Money markets, 27

676–677

income effect, 113

responses to changes in,

liquidity preference framework,

566–567

105–107

selection of targets, 416–419

M1, 52

stock prices, 146

price-level effect, 108

Taylor rule, 428–430

shifts in demand for, 107–108

transmission mechanisms, 604,

Money multiplier, 374

616–626

money supply, 375–378

Monetary theory, 10, 517

variables, 378–381

Monetizing the debt, 644

Money supply, 8

Money, 8–13

aggregate output, 567

checks, 48–49

determinants of, 374, 381–383

commodity money, 48

discount loans, 364

constant-money-growth-rate rule,

discount policy, 400403

654

excess reserves, 359

creation in foreign countries, 644

Federal Reserve balance sheets,

demand for, 532–533

358–359

electronic money (e-money), 51

inflation, 11

evolution of payments system,

money multiplier, 375–378

48–51

movements in, 384

Federal Reserve System, 12

multiple deposit creation, 357,

flat money, 48

365–371

functions of, 45–48

process, 357, 383–390

growth rate, 116

required reserves, 359

inflation, 632–634

reserve requirements, 359,

liquidity, 47, 112–117

403–408

management of interest rates, 12

unemployment, 453

meaning of, 44–45

Money theory, 517–520

measuring, 51–55

Monitoring

modern quantity theory of

credit risk, 218–219

money, 584

principal-agent problems, 182

printing, 644

Moody’s bond ratings, 123

I-14 Index

Moral hazards, 32–33, 174–175

Nonborrowed monetary base,

debt, 180–184

381–382

influences in debt markets,

Non-interest bearing checking

184–188

accounts, 202

regulations, 262–263

Nonpublic banks, open market pur-

Morgan, J. P., 231, 251

chases from, 360–362

Morris, Charles S., 158

Nontransaction deposits, 203

Mortgages. See also federal credit

Notional principal, 328

agencies; loans

NOW (negotiable order of with-

ARMs (adjustable-rate mort-

drawal), 202, 425

gages), 233

NYSE (New York Stock Exchange),

fixed-rate, 233

26, 27, 305

structure of financial markets,

25–28

Obstfeld, Maurice, 467

Multiple deposit creation, 357,

OCC (Office of the Comptroller of

365–371

the Currency), 38, 231, 290

Multipliers, 542

OECD (Organization for Electronic

Muncie, Indiana, 607

Cooperation and

Municipal bond income tax consid-

Development), 265

erations, 125–126

Off-balance-sheet activities,

Muth, John, 147, 150

223–226, 265

Mutual funds, 37, 173, 297–301.

Office of the Comptroller of the

See also financial intermedi-

Currency (OCC), 38, 231, 290

aries

Office of Thrift Supervision (OTS),

efficient market hypothesis, 153

38, 252, 278

money market mutual funds,

Official reserve transaction balance,

238–239

468

Mutual savings banks, 34–35. See

One-period valuation model, 142

also financial intermediaries

Open-end mutual funds, 298

Open market

NAIRU (nonaccelerarting inflation

discovery of, 420

rate of unemployment), 429,

federal funds rate, 395

590

operations, 340, 398–400

NASDAQ (National Association of

purchases form nonpublic banks,

Securities Dealers), 26, 306

360–362

National Bank Act of 1863, 231

purchases from banks, 360

National Credit Union Administration

sales, 362–364

(NCUA), 38, 253

Operating targets, 415

National Credit Union Share

Opportunity cost, 106

Insurance Fund (NCUSIF),

Optimal forecast, 148

40, 253

Options

Nationwide banking, 245–250

call, 322

Natural rate level of output, 575,

financial derivatives, 320–328

590

hedging, 325–326

Natural rate of unemployment, 412,

premiums, 326

590

SEC, 321

I-16 Index

Productivity, foreign exchange mar-

official reserve transaction bal-

kets, 442

ance, 468

Profitability

requirements, 403–408

arbitrage, 313

securitization, 238

banks, 242

sweep accounts, 239–240

equilibrium in interest rates, 98

Residual claimant, 141

loans, 205

Resolution Funding Corporation

options, 322

(RefCorp), 278

unexploited profit opportunity,

Resolution Trust Corporation (RTC),

152

278

Property and casualty insurance,

Restrictions on assets and activities,

288–293

39–40

Prudential supervision, 265

Restrictions

Public pension funds, 295

on entry, 39

Purchase and assumption methods,

on interest rates, 40–41

261

Restrictive covenants, 185

Put (sell) options, 327

Restrictive provisions, insurance

companies, 292

Quantity of assets, 85–87

Retirement funds, government, 37

Quantity of loans demanded, 92

Retirement plans. See pension funds

Quantity theory of money, 519

Return on assets (ROA), 214

Quantity Theory of Money: A

Return on equity (ROE), 214

Restatement, The, 528–532

Returns. See also expected returns

foreign exchange markets,

Radford, R. A., 46

443–448, 448–459

Ramey, Valerie, 622

interest rates, 75–79

Random-walk behavior of stock

segmented markets theory, 132

prices, 154

volatility of, 78

Rapid inflation, 633

Revaluation, 472

Rate of capital gain, 76

Reverse causation, 606

Rate of return, 75. See also returns

Ricardian equivalence, 645

Ratings, bonds. See bonds

Ricardo, David, 645

Rational bubbles, 164

Riegle-Neal Interstate Banking and

Rational expectations

Branching Efficiency Act of

evidence on markets, 162–164

1994, 251

theory of, 147–150

Right axis, 88

revolution, 676–677

Risk, 31

Rationing credit, 220

arbitrage, 313

Ratios, money multiplier, 378–381

assets, 85–87. See also assets

Reagan, Ronald, 276, 348, 675–676

bonds, 96

Real bills doctrine, 420

credit, 208

Real business cycle theory, 596, 616

determining desired level of, 79

Real GDP, 21, 583

equilibrium in interest rates, 96

Real interest rates, 79–82

hedging foreign exchange, 319

Real money balances, 523

interest rates, 78, 86, 208

Real terms, aggregate output, 575

management of credit, 217–220

Index I-17

Schoenholtz, Kermit L., 136

Sell (put) options, 327

Schwartz, Anna, 387, 608

Semistrong-form efficiency, 155

Screening, 217, 291

Separation of commercial banking

SDRs (special drawing rights), 474

and securities industry, 39–40

Sears Roebuck Acceptance

September 11, 2001

Corporation, 297

property and casualty insurance,

Seasoned issues, 303

290

Secondary credit, 402

reserve requirements, 404

Secondary markets, 26

effect on stock market, 146–147

Secondary reserves, 204

Settlement price, futures, 318

Second Bank of the United States,

Shearson, Loeb, Rhodes, 305

230

Shifts in demand curves, 94

SEC (Securities and Exchange

Shiller, Robert J., 136, 157

Commission), 38, 39, 303,

Short positions, 309

321

Short-run output, 668

Secured debt, 172

Short-term debt, 26

Securities, 3, 24

Short-term interest rates, 136

bank holdings, 204–205

Siebert, Horst, 498

brokers, 26

Simple deposit multiplier, 369

capital market, 27

Simple interest rates, 62. See also

dealers, 26

interest rates

efficient market hypothesis,

Simple loans, 62, 63, 64–65

150–152

Simple model, multiple deposit cre-

hot tips, 160

ation, 371

importance of financial interme-

Slow recovery in March 2001 reces-

diaries, 31

sion, 625

lemons problem, 175–180

S&Ls (savings and loan associa-

market operations, 302–306

tions), 34–35, 252, 275. See

mutual funds, 297. See also

also financial intermediaries

mutual funds

FSLIC, 275

separation from commercial

political economy of, 276–278

banks, 39–40

Small-denomination time deposits,

setting prices, 144–147

52

Treasury, 127

Small-firm effect, 156

underwriting, 26

Smart cards, 51. See also payments

Securities Amendment Act of 1975,

systems

306

Social Security, 295, 296

Securities and Exchange

Sources of funds, 201

Commission (SEC), 38, 39,

South Korea, financial crises,

303, 321

194–198

Securitization, 237–238

Spain

Security of electronic payment sys-

EMS, 474

tems, 52

euro, 49

Segmented markets theory, 132

Special drawing rights (SDRs), 474

Seignorage, 493

Specialists, dealer-brokers, 306

Self-correcting mechanism, 591

Specialization in lending, 218

Index I-19

United Kingdom

Venture capital firms, 182, 183

Bank of England, 349–350

Vertical axes, 88

EMS, 474

Virtual banks, 236. See also banks;

gold standard, 469

electronic banking

inflation, 11, 502–506

Visa, 51, 234

United States

Volatile exchange rates, 455

electronic payment systems, 50

Volatility of bond returns, 78

financial crises in, 191–192

Volcker, Paul, 425, 430, 655

financial regulation, 40–41

foreign banks in, 256

Wage push, 594

inflation rates, 11

Wage-setting processes, 653

nationwide banking, 245–250

Wall Street Journal, 72, 142

1980s banking crisis, 273–276

“Credit Markets” column,

structure of commercial banking

103–104

industry, 243–245

Currency Trading, 458

TIPS, 82

Forecasting Survey for 2003,

Unit of accounts, 46

111–112

Universal banking, 251

foreign exchange rates, 437

Universal life insurance, 288

futures, 312

Unsecured debt, 172

options, 321, 326

Unsterilized foreign exchange inter-

stock prices, 159

vention, 464

underwriters, 303

U.S. Government bond yield curve,

War of 1812, 230

138

Weak-form efficiency, 155

Wealth, 45. See also money

Valuation

effects of, 620–621

devaluation, 472

equilibrium in interest rates, 95

generalized dividend valuation

interest rates, 86

model, 143

Wells Fargo, 235

Gordon growth model, 143

White, H., 155

one-period valuation model, 142.

Whole life insurance, 288

See also common stock

World Bank, 470

revaluation, 472

World War I, hyperinflation after, 47

Value Line Survey, 157

World War II, 422–423

Values

World Wide Web (WWW), 247. See

face, 63

also electronic banking; infor-

money. See money

mation technology; Internet

par, 63

banking

present value, 61–62

store of, 47

Yield

Vanguard Group, 79

current, 70–75

Variable life insurance, 288

discounts, 71

Variables, 378–381

returns. See returns

Vault cash, 204

Yield curves, 127

Velocity of money, 518, 520–521,

1980-2003, 137–138

582

liquidity premiums, 135

I-20 Index

Yield curves (continued)

Zombie S&Ls, 275–276. See also

short-term interest rates, 136

S&Ls

U.S. Government bonds, 138

Yield to maturity, 64