Asymmetry in boom-bust shocks: Australian performance with oligopoly

Abstract

Australia's comparatively small and open economy is subject to boom-bust shocks that centre on its exporting mining and agricultural industries which, in average years, are minor contributors to its GDP. The associated real exchange rate effects, however, have important implications for overall performance and its distribution between traded industries and largely non-traded services, the latter contributing four-fifths of its GDP with much of it dominated by oligopolies. A common inference concerning the recent ?China ? boom has been that the following bust will be seriously contractionary, indirectly implying symmetry in economic responses. This paper explores this issue using an economy-wide approach that represents oligopoly behaviour and its regulation explicitly. The results show considerable asymmetry, with booms having proportionally larger effects on performance than busts. This is shown to be affected by oligopoly but to have its roots in neoclassical behaviour. Key implications are that busts do not place all boom gains at risk. Tight regulatory control of pure profits raises and better distributes gains during booms but it prevents pure losses or exits during busts and so exacerbates downturns. Show more