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

Sadia Afrin

    Research output: Contribution to journalArticle

    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.
    Original languageEnglish
    Pages (from-to)119-138
    JournalEconomic Modelling
    Volume85
    DOIs
    Publication statusPublished - 2020

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