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The Economics of Money, Banking and Finance PDF

657 Pages·2008·3.843 MB·English
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The Economics of Money, Banking and Finance Visit the Economics of Money, Banking and Finance, fourth edition Companion Website at www.pearsoned.co.uk/howells to find valuable student learning material including: n Learning objectives for each chapter n Multiple choice and written answer questions to help test your understanding n Annotated links to relevant sites on the web n An online glossary to explain key terms We work with leading authors to develop the strongest educational materials in economics, bringing cutting-edge thinking and best learning practice to a global market. Under a range of well-known imprints, including Financial Times Prentice Hall, we craft high quality print and electronic publications which help readers to understand and apply their content, whether studying or at work. To find out more about the complete range of our publishing, please visit us on the World Wide Web at: www.pearsoned.co.uk FOURTH EDITION The Economics of Money, Banking and Finance A European Text PETER HOWELLS and KEITH BAIN Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk First published 1998 by Addison Wesley Longman Limited Second edition published 2002 Third edition published 2005 Fourth edition published 2008 © Pearson Education Limited 1998, 2002, 2005, 2008 The rights of Peter Howells and Keith Bain to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London ECIN 8TS. ISBN: 978-0-273-71039-4 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Howells, P. G. A., 1947– The economics of money, banking and finance : a European text / Peter Howells and Keith Bain. —4th ed. p. cm. ISBN 978-0-273-71039-4 1. Finance—Europe. 2. Banks and banking—Europe. 3. International finance. I. Bain, K., 1942– II. Title. HG925.H695 2008 332.1094—dc22 2008003078 10 9 8 7 6 5 4 3 2 1 12 11 10 09 08 Typeset in 9/11.5 GraphicSabon by 73 Printed by Ashford Colour Press Ltd, Gosport, Hampshire The publisher’s policy is to use paper manufactured from sustainable forests. Brief contents Contents vii Part 4 Money and Banking Guided tour xii 12 Banks and the supply of money 241 Preface xv 13 The demand for money 265 Acknowledgements xvii 14 Monetary policy 279 Symbols, abbreviations and other conventions xx Part 5 Markets Part 1 Introduction 15 Money markets 303 16 Bond markets 321 1 The role of a financial system 3 17 Equity markets 355 18 Foreign exchange markets 380 Part 2 Financial Institutions and 19 Derivatives – the financial futures Systems markets 411 2 An introduction to financial systems 29 20 Options, swaps and other derivatives 432 3 The UK financial system 75 4 The US financial system 104 Part 6 Current Issues 5 The German financial system 124 21 The internal European market 463 6 The French and Italian financial 22 The European Monetary System and systems 135 monetary union 485 7 Financial systems in Northern Europe 23 The European Central Bank and euro Hans-Michael Trautwein 166 area monetary policy 506 24 Financial innovation 527 Part 3 Theory 25 The regulation of financial markets 547 8 Portfolio theory 185 26 Financial market efficiency 571 9 The determination of short-term Case studies 590 interest rates 196 10 The structure of interest rates 213 Glossary of terms 617 11 The valuation of assets 224 Answers to exercises 623 Index 627 This page intentionally left blank Contents Guided tour xii 2.5 Non-deposit-taking institutions – Preface xv mutual funds 65 Acknowledgements xvii 2.6 Summary 71 Symbols, abbreviations and other Key concepts in this chapter 72 conventions xx Questions and problems 72 Further reading 73 3 The UK financial system 75 Part 1 Introduction 3.1 Introduction 76 3.2 Banks in the UK 76 1 The role of a financial system 3 3.3 Building societies in the UK 84 3.4 Insurance companies 86 1.1 Introduction 4 3.5 Pension funds 89 1.2 Lenders and borrowers 5 3.6 Unit trusts 96 1.3 Financial institutions 10 3.7 Investment trusts 100 1.4 Financial markets 19 3.8 Summary 101 1.5 The financial system and the Key concepts in this chapter 102 real economy 20 Questions and problems 102 1.6 Summary 25 Further reading 102 Key concepts in this chapter 25 Questions and problems 25 4 The US financial system 104 Further reading 26 4.1 Introduction 105 4.2 Deposit-taking institutions in the USA 105 Part 2 Financial Institutions 4.3 The Federal Reserve System 113 and Systems 4.4 Non-depository institutions in the USA 116 4.5 The home mortgage market and subprime lending 119 4.6 Summary 122 2 An introduction to financial Key concepts in this chapter 123 systems 29 Questions and problems 123 2.1 Introduction 30 Further reading 123 2.2 Classification of financial systems 30 5 The German financial system 124 2.3 Banks and other deposit-taking institutions 32 5.1 Introduction 125 2.4 Non-deposit-taking institutions – 5.2 Banks and other deposit-taking insurance companies and pension funds 43 institutions 126 viii CONTENTS 5.3 Non-deposit institutions 130 8.3 Diversification 187 5.4 The use of bond and equity markets 8.4 ‘Market’ and ‘specific’ risk 191 in Germany 131 8.5 The capital asset pricing model 192 5.5 Summary 133 8.6 Summary 194 Key concepts in this chapter 134 Key concepts in this chapter 195 Questions and problems 134 Questions and problems 195 Further reading 134 Further reading 195 6 The French and Italian 9 The determination of financial systems 135 short-term interest rates 196 6.1 Introduction 136 9.1 Introduction 197 6.2 The French banking system 138 9.2 Interest rates defined 6.3 Specialist and non-deposit institutions 144 and classified 197 6.4 Financial markets in France 148 9.3 ‘Market’ theories of interest rate 6.5 The development of the Italian determination 198 financial system 150 9.4 The role of central banks – 6.6 The current position of the Italian ‘administered’ interest rates 206 financial system 152 9.5 A synthesis 210 6.7 Summary 163 9.6 Summary 211 Key concepts in this chapter 164 Key concepts in this chapter 211 Questions and problems 164 Questions and problems 212 Further reading 164 Further reading 212 7 Financial systems in 10 The structure of interest rates 213 Northern Europe 166 10.1 Introduction 214 Hans-Michael Trautwein 10.2 The effect of term 214 10.3 The effect of risk 217 7.1 Introduction 167 10.4 Expectations and government 7.2 Banking systems in the Nordic borrowing 218 countries 168 10.5 Summary 222 7.3 Other financial intermediaries in the Key concepts in this chapter 223 Nordic countries 171 Questions and problems 223 7.4 The evolution and integration Further reading 223 of financial systems in Scandinavia 174 7.5 Monetary policy strategies in the 11 The valuation of assets 224 Nordic countries 177 7.6 Summary 180 11.1 Introduction 225 Key concepts in this chapter 180 11.2 Supply and demand in asset Questions and problems 181 markets 225 Further reading 181 11.3 Asset valuation 227 11.4 The ‘fundamentals’ of asset valuation 232 Part 3 Theory 11.5 An alternative interpretation 233 11.6 Summary 235 Key concepts in this chapter 236 8 Portfolio theory 185 Questions and problems 236 8.1 Introduction 186 Further reading 237 8.2 Risk and return 186 Appendix to Chapter 11 237 CONTENTS ix Part 4 Money and Banking Part 5 Markets 12 Banks and the supply of money 241 15 Money markets 303 12.1 Introduction 242 15.1 Introduction 304 12.2 The definition of money 242 15.2 Money market instruments: 12.3 Banks’ balance sheets 249 characteristics and yields 305 12.4 Models of money supply 15.3 Characteristics and use of the determination 255 money markets 310 12.5 Controlling the money supply 259 15.4 Official intervention in the 12.6 Summary 263 money markets 311 Key concepts in this chapter 263 15.5 The Eurocurrency markets 317 Questions and problems 264 15.6 Summary 319 Further reading 264 Key concepts in this chapter 319 Questions and problems 320 13 The demand for money 265 Further reading 320 13.1 Introduction 266 16 Bond markets 321 13.2 The standard approach to the 16.1 Introduction 322 transmission mechanism 266 16.2 Bonds: types and characteristics 322 13.3 Testing the demand for money – 16.3 Bond prices and yields 324 the outcome 270 16.4 Risk and fixed interest bonds 332 13.4 A more realistic approach to the 16.5 The term structure of interest rates 336 transmission mechanism of 16.6 Characteristics of the bond markets 344 monetary policy 272 16.7 International bonds 348 13.5 Summary 277 16.8 Summary 352 Key concepts in this chapter 277 Key concepts in this chapter 352 Questions and problems 278 Questions and problems 353 Further reading 278 Further reading 354 14 Monetary policy 279 17 Equity markets 355 14.1 Introduction 280 17.1 Introduction 356 14.2 The simple Phillips curve 281 17.2 Company shares: types, 14.3 The ‘expectations-augmented’ characteristics and returns 357 Phillips curve 283 17.3 Equity pricing 358 14.4 The policy irrelevance theorem 285 17.4 Share price movements 368 14.5 The Phillips curve and monetary 17.5 Equity market characteristics 371 policy today 287 17.6 Summary 377 14.6 Rules and discretion in monetary Key concepts in this chapter 377 policy 290 Questions and problems 378 14.7 Governments, inflationary Further reading 378 incentives and independent central 18 Foreign exchange markets 380 banks 293 14.8 Summary 297 18.1 Introduction 381 Key concepts in this chapter 298 18.2 Foreign exchange rates in the Questions and problems 298 Financial Times 384 Further reading 299 18.3 Interest rate parity 396

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