Financial Markets, Banking, and Monetary Policy

Preface

The financial system—financial markets along with commercial banks and other institutions—can be likened to a mosaic. The individual pieces appear to be dissimilar and unrelated when they are set apart. However, when they are put together, they represent a coherent and magnificent system. This system is affected in a major way by monetary policy, and monetary policy is transmitted through the financial system to the economy and inflation. The recent financial crisis and the ensuing Great Recession amply demonstrated the dependence of the economy on a well-functioning financial system. Disruptions in certain parts of the financial market spread throughout the financial system and led to the most severe economic downturn and loss of jobs since the Great Depression of the 1930s.

In this book, I introduce and develop the role of each major financial market and institution, and describe how each becomes part of the greater mosaic of the financial system. I also describe important features of central banks—which have been given primary responsibility today for achieving macroeconomic goals—and how they go about pursuing goals for inflation and the economy. A special focus is placed on the nexus of monetary policy and the financial system, most notably the commercial banking sector. While much attention is placed on the United States, the book develops principles in a generic manner that applies to other financial systems and economies.

My approach is to base the material ...