Overview

The financial system is a densely interconnected network of financial intermediaries, facilitators, and markets that serves three major purposes: allocating capital, sharing risks, and facilitating intertemporal trade. Asset prices are an important mechanism in each of these phenomena. Capital allocation, whether through loans or other forms of investment, can vary both across sectors-at the broadest, manufactures, agriculture, and services-and within sectors, for example different firms. The risk that various investors are willing to take reflects their financial position and alternative opportunities. Risk and asset allocation are also influenced by whether money, and especially its expenditure, is more important now or in the future. These decisions are all influenced by governmental policies. When there are mismatches, the results include financial meltdowns, fiscal deficits, sovereign debt, default and debt crises. Harold L. Cole provides a broad overview of the financial system and assets pricing, covering history, institutional detail, and theory. The book begins with an overview of financial markets and their operation and then covers asset pricing for standard assets and derivatives, and analyzes what modern finance says about firm behavior and capital structure. It then examines theories of money, exchange rates, electronic payments methods, and cryptocurrencies. After exploring banks and other forms of financial intermediation, the book examines the role they played in the Great Recession. Having provided an overview of the provate sector, Cole switches to public finance and government borrowing as well as the incentives to monetize the public debt and its consequences. The book closes with an examination of sovereign debt crises and an analysis of their various forms. Finance and financial intermediation are central to modern economies. This book covers all of the material a sophisticated economist needs to know about this area.

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9780190949068

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Reviews

Cole's new book on money, credit, and banking represents an enchanting break from the typical undergraduate text on money and banking. Standard texts spend large amount of time on simplistic models of the money multiplier, mechanics of open market operations, and in institutional details of the U.S. financial system. Cole's book instead integrates the analysis of money and banking with a modern treatment of finance, boiled down to its essence. Cole then applies the simple apparatus he develops to topical issues in macroeconomics. The resulting product is one that will be a delight to teach to undergraduates. Overall, it represents a breakthrough turning what was often a dreary subject to both study and teach into an exciting one for both professors and students. I recommend it highly. -- Patrick Kehoe, Professor of Economics, Stanford University and Consultant, Federal Reserve Bank of Minneapolis This remarkable book sets the standard for rigor and clarity in thinking about money and financial markets. This is an exciting and essential contribution to the analysis of financial systems. -- Thomas Cooley, Paganelli-Bull Professor of Economics Emeritus, Stern School of Business, New York University Over the past forty years, there has been a revolution in the way economists think about money, credit, and banking. In this exciting book, Harold Cole makes those important modeling innovations accessible to a broad audience. Instructors of advanced undergraduates or Ph.D. students in either economics or finance will find Cole's treatment to be at once fully rigorous and eminently approachable. - -- Narayana Kocherlakota, Lionel W. McKenzie Professor of Economics, University of Rochester Hal Cole masterfully combines economic theory, data, and history to examine the workings of financial markets. He makes modern theories accessible to undergraduate students without losing their theoretical and empirical foundations. This book stands out, and should be very beneficial to any advanced undergrad or masters student interested in financial economics. -- Mikhail Golosov, University of Chicago This book delivers a unique and up-to-date treatment of the key concepts in finance from a macroeconomic point of view. Written in an engaging style, it blends theory, history, and institutional structure to illustrate how and why finance matters. Cole simultaneously provides the foundation for an innovative course and an excellent reference on topics ranging from the fundamentals of asset pricing to electronic payments and cryptocurrencies. -- Todd Keister, Professor of Economics, Rutgers University

Author Information

Harold L. Cole is a Professor of Economics at the University of Pennsylvania and the Editor of the International Economic Review. He is a Fellow of the Econometric Society and the Society for the Advancement of Theory. He is a research associate of the NBER and a visiting scholar at the Federal Reserve Banks of Philadelphia

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