This paper evaluates the role of financial frictions and imperfect banking competition in the Brazilian business cycle. I estimated a dynamic stochastic general equilibrium (DSGE) model that incorporates a Cournot banking sector where banks accumulate capital subject to a capital adequacy requirement. The findings show that the spread is more significant in scenarios with imperfect banking competition and bank capital adequacy requirements. The amplified countercyclical spread, which arises from the interaction of the imperfect banking competition and bank stress channels, tends to amplify the response of output, consumption, and other macroeconomic variables to adverse shocks. The results show that most of the spread increase in Brazil is due to financial shocks, especially after 2008.
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