Journal of Scientific Papers

ECONOMICS & SOCIOLOGY


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ISSN 2071-789X

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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 

 

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

 

DOI: 10.14254/2071-789X.2023/16-4/3

JEL ClassificationE31, E32, E58

Keywords: interest rate, central bank, inflation, business cycle, 100 percent reserve requirements, banking ethics