Whats New in the Seventh Edition

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In addition to the expected updating of all data through the end of 2002 whenever possible, there is major new material in every part of the text. Indeed, this revision is one of the most substantial that I have ever done.

Expanded Coverage of the Stock Market

With the wide swings in the stock prices in recent years, students of money and banking have become increasingly interested in what drives the stock market. As a result, I have expanded the discussion of this market by describing simple valuation methods for stocks and examining recent developments in the stock market and the link between monetary policy and stock prices. I have combined this material with the discussion of the theory of rational expectations and efficient capital markets to create a new Chapter 7, "The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis."

New Material on






In light of continuing changes in financial markets and institutions, I have added the following new material to keep the text current:

• Extensive discussion of recent corporate scandals and the collapse of Enron, including their impact on the economy (Chapters 6, 7, 11, and 26)

• Discussion of the role of venture capitalists in the high-tech sector (Chapter 8)

• Examination of how information technology is influencing bank consolidation, and analysis of whether clicks will dominate bricks in the banking industry (Chapter 10)

• New material on the Basel Committee on Bank Supervision and where the Basel Accord is heading (Chapter 11)

• Discussion of the spread of deposit insurance throughout the world (Chapter 11)

• Perspective on the growing concerns about Fannie Mae and Freddie Mac (Chapter 12)

• A new type of special-interest box, the E-Finance box, which relates how changes in technology have affected the conduct of business in banking and financial markets. The placement of these boxes throughout the text helps to demonstrate the impact of technology across a broad range of areas in finance.

The growing importance of the global economy has encouraged me to add more new material with an international perspective:

• Extensive discussion of recent developments in Argentina (Chapters 1, 8, 11, 20, and 21)

• Analysis of how central banks set overnight interest rates in other countries (Chapter 17)

• Discussion of how the euro has fared in its first four years (Chapter 19)

• Additional treatment of recent events in the Japanese economy (Chapters 11 and 26)

New Material on Monetary Theory and Policy


Drawing on my continuing involvement with central banks around the world, I have added new material to keep the discussion of monetary theory and policy current:

• New boxes on Fed watching and Federal Reserve transparency (Chapters 14 and 18)

• Discussion of the changes (implemented in 2003) in the way the Fed administers the discount window (Chapter 17)

• An updated discussion of the market for reserves and how the channel/corridor system for setting interest rates works (Chapter 17)

• Discussion of how the recent corporate scandals have hindered the recovery of the economy from the 2001-2002 recession (Chapter 25)

The incredible advances in electronic (computer and telecommunications) technology in recent years have had a major impact on the financial system. This Seventh Edition reflects these developments by adding many new features with an electronic focus.

Web Enhancement. The Seventh Edition embraces the exploding world of information now available over the World Wide Web. There are few areas where the Internet has been as valuable as in the realm of money, banking, and financial markets. Data that were once difficult and tedious to collect are now readily available. To help students appreciate what they can access online, I have added a number of new features:

1. Web Exercises. This edition adds all-new end-of-chapter Web Exercises. These require that students collect information from online sources or use online resources to enhance their learning experience. The Web Exercises are relatively quick and easy to complete, while still accomplishing the goal of familiarizing students with online sources of data.

2. Web Sources. Much of the data used to create the many tables and charts were collected from online sources. Wherever a Web URL is available, it is exactly reported as the source. The interested student or instructor can use this URL to see what has happened since the chart or table was created.

3. Marginal Web References. In addition to listing the sources of data used to create the charts and graphs, I have also included in the margin URLs to Web sites that provide information or data that supplement the text. These references include a brief description of what students will find at the site. Interested students can use these sites to extend their study, and instructors can draw from them to supplement their lecture notes. Because the URLs for Web sources and references do sometimes change, the Mishkin Companion Web Site at www.aw.com/mishkin will provide the new URLs when they are needed.

E-Finance Boxes. To illustrate how electronic technology has increasingly permeated financial markets and institutions, I have included the all-new E-Finance boxes, described earlier, to show the ongoing real-world impact of this remarkable development.

Streamlined As textbooks go into later editions, they often grow in length. Over the years, I have

Coverage and resisted this tendency, and in this edition have made even greater efforts to stream-

Organization line the book. Despite the addition of a lot of new material, the book is substantially shorter. Moreover, at the suggestion of reviewers, I have moved the discussion of rational expectations and efficient markets earlier in the book, to Chapter 7. I have also shifted the material on the foreign exchange market and the determination of exchange rates to Chapter 19 so that it comes immediately before the chapter on the international financial system, allowing this material to be taught together.

Appendices on the Web

The Web site for this book, www.aw.com/mishkin, has allowed me to produce a large amount of new material for the book without lengthening the text, because we have placed this material in appendices on the Web site. The appendices include:

Chapter 2: Financial Market Instruments Chapter 4: Measuring Interest-Rate Risk: Duration Chapter 5: Models of Asset Pricing

Chapter 5: Applying the Asset Market Approach to a Commodity Market:

The Case of Gold Chapter 9: Duration Gap Analysis Chapter 9: Measuring Bank Performance

Chapter 11: Evaluating FDICIA and Other Proposed Reforms of the Bank Regulatory System

The Fed's Balance Sheet and the Monetary Base

The M2 Money Multiplier

Explaining the Behavior of the Currency Ratio

A Mathematical Treatment of the Baumol-Tobin and Tobin Mean

Variance Model

Instructors can either use these appendices in class to supplement the material in the textbook, or recommend them to students who want to expand their knowledge of the money and banking field.














In using previous editions, adopters, reviewers, and survey respondents have continually praised this text's flexibility. There are as many ways to teach money, banking, and financial markets as there are instructors. To satisfy the diverse needs of instructors, the text achieves flexibility as follows:

• Core chapters provide the basic analysis used throughout the book, and other chapters or sections of chapters can be used or omitted according to instructor preferences. For example, Chapter 2 introduces the financial system and basic concepts such as transaction costs, adverse selection, and moral hazard. After covering Chapter 2, the instructor may decide to give more detailed coverage of financial structure by assigning Chapter 8, or may choose to skip Chapter 8 and take any of a number of different paths through the book.

• The text also allows instructors to cover the most important issues in monetary theory and policy without having to use the ISLM model in Chapters 23 and 24, while more complete treatments of monetary theory make use of the ISLM chapters.

• The internationalization of the text through marked international sections within chapters, as well as through complete separate chapters on the foreign exchange market and the international monetary system, is comprehensive yet flexible. Although many instructors will teach all the international material, others will not. Instructors who want less emphasis on international topics can easily skip Chapter 19 on the foreign exchange market and Chapter 20 on the international financial system and monetary policy. The international sections within chapters are self-contained and can be omitted with little loss of continuity.

To illustrate how this book can be used for courses with varying emphases, several course outlines are suggested for a semester teaching schedule. More detailed information about how the text can be used flexibly in your course is available in the Instructors Manual.

• General Money and Banking Course: Chapters 1-5, 9—11, 14, 17, 18, 25, 27, with a choice of 6 of the remaining 15 chapters.

• General Money and Banking Course with an International Emphasis: Chapters 1—5, 9—11, 14, 17—20, 25, 27 with a choice of 4 of the remaining 13 chapters.

• Financial Markets and Institutions Course: Chapters 1-13, with a choice of 6 of the remaining 15 chapters.

• Monetary Theory and Policy Course: Chapters 1-5, 14, 15, 17, 18, 21, 25-28, with a choice of 5 of the remaining 14 chapters.

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