The Term Structure of Savings, The Yield Curve, and Maturity Mismatching
In this article co-authored with David Howden and published in the Quarterly Journal of Austrian Economics 13 (3), pp. 64-85, 2010, we elaborate on the subject of maturity mismatching as set out in my awarded article: Austrian Business Cycle Theory: Are 100 percent reserves sufficient to prevent a business cycle.
ABSTRACT: Recognizing different types of savings allows for a more
fruitful analysis of the business cycle. Sustainable investment activities
must be fnanced 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 mismatched borrowing driven by three banking
sector interventions: credit expansion, the provision of a lender of last
resort, and government bailout guarantees.
KEYWORDS: business cycles, recession, term structure of interest rates,
JEL CLASSIFICATION: E02, E3, E43, E52