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The Term Structure of Savings, the Yield Curve, and Maturity Mismatching

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  • Bagus, Philipp
  • Howden, David

Abstract

Recognizing different types of savings allows for a more fruitful analysis of the business cycle. Sustainable investment activities must be financed by an equivalent amount of savings, both in length of availability and quantity. Upward sloping yield curves are a feature of the unhampered loanable funds market. Interest rates differ along this curve depending on the investment community’s demand for funds. While free market maturity mismatching can be successful and advance intermediation, the existence of either a central bank or a fractional reserve banking system skew the yield curve, resulting in malinvestment fueled boom-bust cycles. Credit expansion alone fails to explain the full extent of these cycles. Additional causes of the business cycle are found via excessive maturity mistmatched borrowing driven by three banking sector interventions: credit expansion, the provision of a lender of last resort, and government bailout guarantees.

Suggested Citation

  • Bagus, Philipp & Howden, David, 2010. "The Term Structure of Savings, the Yield Curve, and Maturity Mismatching," MPRA Paper 79592, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:79592
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    References listed on IDEAS

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    1. Bagus, Philipp & Howden, David, 2009. "The Federal Reserve System and Eurosystem's Balance Sheet Policies During the Financial Crisis: A Comparative Analysis," MPRA Paper 79588, University Library of Munich, Germany.
    2. David Howden, 2010. "Knowledge shifts and the business cycle: When boom turns to bust," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 23(2), pages 165-182, June.
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    7. Howden, David, 2009. "Fama's Efficient Market Hypothesis and Mises' Evenly Rotating Economy: Comparative Constructs," MPRA Paper 79586, University Library of Munich, Germany.
    8. Frank H. Knight, 1936. "The Quantity of Capital and the Rate of Interest: II," Journal of Political Economy, University of Chicago Press, vol. 44, pages 612-612.
    9. Charles P. Kindleberger & Robert Z. Aliber, 2005. "Manias, Panics and Crashes," Palgrave Macmillan Books, Palgrave Macmillan, edition 0, number 978-0-230-62804-5.
    10. Paul Davidson, 2002. "Financial Markets, Money and the Real World," Books, Edward Elgar Publishing, number 2467.
    11. Philipp Bagus & Markus H. Schiml, 2009. "New Modes Of Monetary Policy: Qualitative Easing By The Fed," Economic Affairs, Wiley Blackwell, vol. 29(2), pages 46-49, June.
    12. Philipp Bagus & David Howden, 2009. "The Federal Reserve And Eurosystem´S Balance Sheet Policies During The Financial Crisis: A Comparative Analysis," Romanian Economic Business Review, Romanian-American University, vol. 4(3), pages 165-186, September.
    13. Philipp Bagus & David Howden, 2009. "The Legitimacy of Loan Maturity Mismatching: A Risky, but not Fraudulent, Undertaking," Journal of Business Ethics, Springer, vol. 90(3), pages 399-406, December.
    14. Hyun Song Shin, 2009. "Reflections on Northern Rock: The Bank Run That Heralded the Global Financial Crisis," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 101-119, Winter.
    15. Fritz Machlup, 1935. "Professor Knight and the "Period of Production"," Journal of Political Economy, University of Chicago Press, vol. 43, pages 577-577.
    16. Bagus, Philipp & Howden, David, 2009. "Qualitative Easing in Support of a Tumbling Financial System: A Recent Look at the Eurosystem´s Recent Balance Sheet Policies," MPRA Paper 79587, University Library of Munich, Germany.
    17. Philipp Bagus & David Howden, 2009. "Qualitative Easing In Support Of A Tumbling Financial System: A Look At The Eurosystem'S Recent Balance Sheet Policies," Economic Affairs, Wiley Blackwell, vol. 29(4), pages 60-65, December.
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    Citations

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    Cited by:

    1. Philipp Bagus, 2011. "The Eurosystem: Costs and Tragedies," Chapters, in: David Howden (ed.), Institutions in Crisis, chapter 7, Edward Elgar Publishing.
    2. Philipp Bagus & David Howden, 2012. "Monetary equilibrium and price stickiness: A rejoinder," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 25(3), pages 271-277, September.
    3. Eduard Braun & David Howden, 2017. "The rise and fall of the subsistence fund as a resource constraint in Austrian business cycle theory," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 30(2), pages 235-249, June.
    4. Philipp Bagus & David Howden & Amadeus Gabriel, 2015. "Oil and Water Do Not Mix, or: Aliud Est Credere, Aliud Deponere," Journal of Business Ethics, Springer, vol. 128(1), pages 197-206, April.
    5. Philipp Bagus & David Howden & Jesús Huerta de Soto Ballester, 2018. "Entrepreneurial Error Does Not Equal Market Failure," Journal of Business Ethics, Springer, vol. 149(2), pages 433-441, May.
    6. Van Den Hauwe, Ludwig, 2017. "Monetary Constitutionalism: Some Recent Developments," MPRA Paper 83052, University Library of Munich, Germany.
    7. Bagus, Philipp & Howden, David, 2013. "Some Ethical Dilemmas with Modern Banking," MPRA Paper 79599, University Library of Munich, Germany.
    8. Howden, David, 2013. "The Rise and Fall of the Icelandic Economy," MPRA Paper 79603, University Library of Munich, Germany.
    9. Gabriel A. Giménez-Roche, 2011. "Institutional Illusion and Financial Entrepreneurship in the European Debt Scheme," Chapters, in: David Howden (ed.), Institutions in Crisis, chapter 1, Edward Elgar Publishing.
    10. David Howden & Amadeus Gabriel, 2015. "The Interest Rate Brake on Maturity Transformation," Journal of Economic Issues, Taylor & Francis Journals, vol. 49(4), pages 1100-1111, October.
    11. Romain Baeriswyl, 2014. "Intertemporal discoordination in the 100 percent reserve banking system," Working Papers 14.06, Swiss National Bank, Study Center Gerzensee.

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    More about this item

    Keywords

    business cycles; recession; term structure of interest rates; monetary policy;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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