Austrian business cycle theory: are 100 percent reserves sufficient to prevent a business cycle?

Economists in the tradition of the Austrian school have shown that one type of maturity mismatching can cause maladjustments and business cycles.1 When banks expand credit, by granting loans and creating demand deposits, they generate immediately withdrawable liabilities to finance longer-term loans. The newly created demand deposits do not represent a reduction of consumption, i.e., that characterized by real savings. As a con sequence, in terest rates are artificially reduced under the level they would have been in a free market reflecting real savings and time preference rates.2 Thus, entrepreneurs are prone to engage in more and longer projects than could be financed with the available supply of real savings. Before all projects that are financed by the credit expansion are finished, a bust occurs. An absence of realsavings to sustain the factors of production in the production pro cesses and to produce complementary and necessary capital goods becomes evident. As a result, malinvestments are liquidated and the structure of production is brought in line with consumer preferences again. This is the Austrian Business Cycle Theory (ABCT) in a nutshell. As a remedy Austrian economists such as Selgin (1988) and White (1999) have argued that a free banking system would be a means to inhibit the excessive credit expansion that causes business cycles. They maintain that the competition between banks would limit the credit expansion of the banking system effectively. Other Austrians such as Rothbard (1991) and Huerta de Soto (2006) have gone further and advocate a 100 percent re - rerve banking system ruling out credit expansion altogether.3 In this article it is argued that a 100 percent reserve system can still bring about artificial booms by maturity mismatching if there is a central bank or government support and guarantees for the ban king system. Even if we accept the case for a 100 percent re - serve requirement, we see that the maturity mismatching of liabilities and assets (borrowing short and lending long) is itself perilous–and in the same sense that fractional reserves are perilous.

Maturity mismatching, ethics and economics: Rejoinder to Bagus, Howden and Huerta de Soto

Is maturity mismatching, borrowing short and lending long, merely risky, or would it be banned in the free society as a rights violation? The pres-ent paper is the latest episode in a debate series on this issue. The present authors take the position it is unethical and should be against the law. Our debating partners subscribe to the opposite point of view. Keywords: Banking, lending, ethics, law. JEL Classification: E2, E59, P16. Resumen: ¿Es el descalce de plazos, es decir, endeudarse a corto y prestar a largo plazo, simplemente arriesgado, o estaría prohibido en una sociedad libre como una violación de derechos? El presente artículo es el último episodio de una serie de debates sobre este tema. Los presentes autores toman la posi-ción de que no es ético y debería estar en contra de la ley. Nuestros compañe-ros en el debate mantienen el punto de vista contrario. Palabras clave: Banca, préstamos, ética, Derecho. Clasificación JEL: E2, E59, P16.

An Empirical Study on the Factors Influencing on the Hedge Effectiveness of Korea Treasury Bond Futures

This paper performs the empirical analysis on the factors affection the hedge effectiveness of Korea Treasury Bond (KTB) Futures by different hedge models. Before analyzing the factors, firstly, we compare the hedge effectiveness for benchmark bond portfolio among different hedge models. We find that KTB Futures' hedge effectiveness do not produce significant difference depending on the different models. Secondly, we test hedge effectiveness for the corporate bond. The results vary depending on the credit ranks. Below BBB rating, hedge effectiveness deteriorated significantly. This seems to be caused by the fact that BBB rated bond is more prone to be affected by credit risk rather than interest rate risk. Thirdly, hedge effectiveness analysis for the maturity term mismatch, KTB Futures has performed poorly as underlying bond maturity mismatching with Futures. Finally, different yield curve shape, Futures price undervaluation or time to maturity of Futures do not produce significant effect for the hedge effectiveness. In summary hedge effectiveness of KTB Futures (3 Year, 10 Year) seems to be dominantly affected by the 1) underlying hedging bond credit rating and 2) hedge term mismatch. Other factors such as yield curve shape, undervaluation of Futures and time to maturity of Futures has limited contribution under our research.

Debt Financing, Corporate Governance and Overinvestment

This paper examines the impact of debt financing on overinvestment in Chinese listed companies. Using an accounting-based framework to measure over-investment and free cash flow, we find evidence that, debt financing can’t mitigate overinvestment in Chinese listed manufacturing companies. Further tests examine whether firm’s governance structures are associated with overinvestment. The evidence suggests that governance factors also can’t mitigate over-investment in China. Reasons lie that hard constraint of debt financing doesn’t play its role in China. There also exists assets maturity and debt maturity mismatching problems in Chinese manufacturing listed companies.