The central banking system paradox
Vol. 16, No 4, 2023
Víctor I. Espinosa
Universidad Autónoma de Chile, Universidad del Desarrollo, Santiago, Chile E-mail: vespinosa@udd.cl ORCID 0000-0002-2481-5082
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The central banking system paradox |
Miguel A. Alonso-Neira
Universidad Rey Juan Carlos, Madrid, Spain E-mail: miguelangel.alonso@urjc.es ORCID 0000-0002-6778-3594 Jesús Huerta de Soto
Universidad Rey Juan Carlos, Madrid, Spain E-mail: huertadesoto@dimasoft.es ORCID 0000-0002-8358-1220 |
Abstract. The conventions of monetary theory assume the central banking system (CBS) as the starting point for achieving the stability and efficiency of the financial system. This paper stresses the stability-efficiency thesis based on the Austrian business cycle theory (ABCT). It argues that the stability-efficiency thesis under CBS poses a paradox for two main reasons. First, central banks' interest rate handling causes business cycles, yielding the intertemporal discoordination of the money and goods markets. Second, a central bank's lender-of-last-resort role is an incentive to call for further interest rate handling, making the chance of smooth business cycles difficult or impossible. This paradox is empirically analyzed and discussed through the True Money Supply (TMS) performance in the United States's business cycle phases between 1975 and 2022. Consistent with the ABCT, the research results unlock the paradox by showing that CBS causes business cycles. Some policy implications are outlined for further research and revision of monetary theory. |
Received: February, 2023 1st Revision: September, 2023 Accepted: December, 2023 |
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DOI: 10.14254/2071-789X.2023/16-4/3 |
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JEL Classification: E31, E32, E58 |
Keywords: interest rate, central bank, inflation, business cycle, 100 percent reserve requirements, banking ethics |