Abstract
This paper investigates how business cycles and interest rate fluctuations affect cartel dynamics. To do so, we apply a Hidden Markov Model to a unique dataset on a population of (legal) cartels in Sweden, from 1947 to 1993. We find that GDP shocks and higher interest rates, as a proxy for borrowing costs, increase cartel formation and reduce cartel dissolution, with stronger effects in the manufacturing sector. Thus, GDP shocks and higher interest rates lead to an increase in the number of cartels in the economy. These findings highlight how cartels act as shock absorbers, helping firms handle economic instability and reducing the impact of both positive and negative shocks.