R. Glenn Hubbard is the dean and Russell L. Carson Professor of Finance and Economics in the Graduate School of Business at Columbia University and professor of economics in Columbia’s Faculty of Arts and Sciences. He is also a research associate of the National Bureau of Economic Research and a director of Automatic Data Processing, Black Rock Closed-End Funds, KKR Financial Corporation, and MetLife. He received

his Ph.D. in economics from Harvard University in 1983. From 2001 to 2003, he served as chairman of the White House Council of Economic Advisers and chairman of the OECD Economy Policy Committee, and from 1991 to 1993, he was deputy assistant secretary of the U.S. Treasury Department. He currently serves as co-chair of the nonpartisan Committee on Capital Markets Regulation and the Corporate Boards Study Group.

Hubbard’s fields of specialization are public economics, financial markets and institutions, corporate finance, macroeconomics, industrial organization, and public policy. He is the author of more than 100 articles in leading journals, including American Economic Review, Brookings Papers on Economic Activity, Journal of Finance, Journal of Financial Economics, Journal ofMoney, Credit, and Banking, Journal of Political Economy,

Journal of Public Economics, Quarterly Journal of Economics, RAND Journal of Economics, and Review of Economics and Statistics. His research has been supported by grants from the National Science Foundation, the National Bureau of Economic Research, and numerous private foundations.

Anthony Patrick O’Brien is a professor of economics at Lehigh University. He received a Ph.D. from the University of California, Berkeley, in 1987. He has taught principles of economics for more than 15 years, in both large sections and small honors classes. He received the Lehigh University Award for Distinguished Teaching. He was formerly the director of the Diamond Center for Economic Education and was named a Dana Foundation Faculty Fellow and Lehigh Class of 1961 Professor of Economics. He has been a visiting professor at the University of California, Santa Barbara, and the Graduate School of Industrial Administration at Carnegie Mellon University. O’Brien’s research has dealt with such issues as the evolution of the U.S. automobile industry, sources of U.S. economic competitiveness, the development of U.S. trade policy, the causes of the Great Depression, and the causes of black-white income differences. His research has been published in leading journals, including American Economic Review, Quarterly Journal of Economics, Journal ofMoney, Credit, and Banking, Industrial Relations, Journal of Economic History, Explorations in Economic History, and the Journal of Policy History. His research has been supported by grants from government agencies and private foundations. In addition to teaching and writing, O’Brien also serves on the editorial board of the Journal of Socio-Economics.

Chapter 1 Introducing Money and the Financial System 1

Chapter 2 Money and the Payments System 25

Chapter 3 Interest Rates and Rates of Return 51

Chapter 4 Determining Interest Rates 87

Chapter 5 The Risk Structure and Term Structure

of Interest Rates 123

Chapter 6 The Stock Market, Information, and

Financial Market Efficiency 156

Chapter 7 Derivatives and Derivative Markets 189

Chapter 8 The Market for Foreign Exchange 224

Chapter 9 Transactions Costs, Asymmetric Information,

and the Structure of the Financial System 252

Chapter 10 The Economics of Banking 279

Chapter 11 Investment Banks, Mutual Funds, Hedge

Funds, and the Shadow Banking System 314

Chapter 12 Financial Crises and Financial Regulation 347

Chapter 13 The Federal Reserve and Central Banking 384

Chapter 14 The Federal Reserve’s Balance Sheet

and the Money Supply Process 411

Chapter 15 Monetary Policy 442

Chapter 16 The International Financial System

and Monetary Policy 481

Chapter 17 Monetary Theory I: The Aggregate Demand

and Aggregate Supply Model 514

Chapter 18 Monetary Theory II: The IS—MP Model 546

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