An economic model for the interpretation of business cycles and the efficiency of monetary policy

This paper attempts to investigate business cycles, assuming that both national income and the interest rate on loans are determined jointly in the product market and the banking sector. For this reason, a second order accelerator model in discrete time is combined with a two-stage Cournot game with scope economies for the oligopolistic banking sector. The presence of scope economies increases liquidity and hence, the destabilizing influence of the financial sector, affecting in turn the effectiveness of monetary policy. In addition, the model is calibrated to assess the ability of our system to interpret the cyclical path of national income over time and the possibility of the latter's convergence towards its steady-state. Performing a simulation process, we present the implications of different permanent shocks of monetary policy on national income diachronically.