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Does oligopolistic banking friction amplify small open economy's business cycles? Evidence from Australia

Sadia Afrin

Economic Modelling, 2020, vol. 85, issue C, 119-138

Abstract: This paper studies financial friction arising from oligopolistic bank competition and its impacts on a small open economy's business cycles by applying imperfect competition and endogenous firm entry theory. Using Australian data, the estimated model implies a countercyclical mark up in lending rate that varies inversely with number of banks. Such bank sector has a distinct shock propagation mechanism that often amplifies business cycles, depending on the type of shock. Balance sheet effects appear different compared to competitive banks, due to strategic bank behaviour. Unlike previous estimated small open economy general equilibrium studies, the model can capture substantial international transmissions.

Keywords: Oligopolistic banks; DSGE model; Bank entry; Open economy; Bayesian inference (search for similar items in EconPapers)
JEL-codes: L11 L13 E32 E44 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:85:y:2020:i:c:p:119-138

DOI: 10.1016/j.econmod.2019.05.011

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