This reading supplements Chapter 8's treatment of exchange rate determination. Part Three of the text develops an economic framework for analyzing financial structure and institutions and uses it to examine such topics as the importance of financial intermediaries as sources of finance for businesses, financial innovation, bank management, banking industry structure, and bank regulatory issues. Several of these concerns are treated in the readings for Part Three. Because this area of the field changes rapidly, these readings play an important role in keeping course content up to date. This reading supplements Chapter 9's discussion of asymmetric information and financial structure.
Berlin discusses the significance of long-term relationships between business borrowers and lenders.
Instructors will find this reading an enlightening extension of Chapter 9's material on financial structure and lending or Chapter 10's discussion of customer relationships as a tool for managing credit risk. Schaan and Cogley address asymmetric information problems in the context of financial crises and discuss the advantages and disadvantages of intervention by monetary policymakers when a crisis is at hand. Mester describes how credit scoring works and examines the effects on lenders and borrowers of its growing use in small-business lending. This reading supplements Chapter 10's discussion of bank lending and credit-risk management. This reading also supplements Chapter 10's discussion of the banking business.