Introduction 1
1 Why Study Money, Banking, and Financial Markets? . . . . . . . . . . . . . . . . . . . .3
2 An Overview of the Financial System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
3 What Is Money? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
Financial Markets 59
4 Understanding Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61
5 The Behavior of Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85
6 The Risk and Term Structure of Interest Rates . . . . . . . . . . . . . . . . . . . . . . . .120
7 The Stock Market, the Theory of Rational Expectations,
and the Efficient Market Hypothesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .141
Financial Institutions 167
8 An Economic Analysis of Financial Structure . . . . . . . . . . . . . . . . . . . . . . . .169
9 Banking and the Management of Financial Institutions . . . . . . . . . . . . . . . . .201
10 Banking Industry: Structure and Competition . . . . . . . . . . . . . . . . . . . . . . . .229
11 Economic Analysis of Banking Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . .260
12 Nonbank Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .287
13 Financial Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .309
Central Banking and the Conduct of
Monetary Policy 333
14 Structure of Central Banks and the Federal Reserve System . . . . . . . . . . . . .335
15 Multiple Deposit Creation and the Money Supply Process . . . . . . . . . . . . . .357
16 Determinants of the Money Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .374
17 Tools of Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .393
18 Conduct of Monetary Policy: Goals and Targets . . . . . . . . . . . . . . . . . . . . . .411
International Finance and Monetary Policy 433
19 The Foreign Exchange Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .435
20 The International Financial System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .462
21 Monetary Policy Strategy: The International Experience . . . . . . . . . . . . . . . .487
Monetary Theory 515
22 The Demand for Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

The Keynesian Framework and the ISLM Model . . . . . . . . . . . . . . . . . . . . . .536
24 Monetary and Fiscal Policy in the ISLM Model . . . . . . . . . . . . . . . . . . . . . . .561
25 Aggregate Demand and Supply Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . .582
26 Transmission Mechanisms of Monetary Policy: The Evidence . . . . . . . . . . . .603
27 Money and Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .632
28 Rational Expectations: Implications for Policy . . . . . . . . . . . . . . . . . . . . . . . .658