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Financial Markets, Banking, and Monetary Policy


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

THOMAS D. SIMPSON served as a senior officer at the Board of Governors of the Federal Reserve System. In addition to his other responsibilities, he was an officer of the Federal Open Market Committee. Simpson is on the faculty at the University of North Carolina Wilmington.

Preface xvii

CHAPTER 1: Introduction 1

CHAPTER 2: Overview of the Financial System 17

CHAPTER 3: The Special Role of Commercial Banks 33

CHAPTER 4: The Pricing of Financial Assets 55

CHAPTER 5: Factors Affecting Yields 75

CHAPTER 6: Principles of Portfolio Selection and Effi cient Markets 97

CHAPTER 7: The Money Market 111

CHAPTER 8: The Bond Market 125

CHAPTER 9: Securitization 143

CHAPTER 10: The Mortgage Market 155

CHAPTER 11: The Equity Market 167

CHAPTER 12: Central Banking and the Federal Reserve 183

CHAPTER 13: Monetary Policy: The Basics 211

CHAPTER 14: Monetary Policy: Challenges Faced by Policymakers 231

CHAPTER 15: Financial Crises 247

CHAPTER 16: The Foreign Exchange Market and Exchange Rate Regimes 263

CHAPTER 17: Depository Institutions 285

CHAPTER 18: Mutual Funds 305

CHAPTER 19: Hedge, Venture Capital, and Private Equity Funds 319

CHAPTER 20: Large Institutional Investors 333

About the Author 347

Index 349