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Insolvency and Economic Development:Regional Variation and Adjustment

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  • Richard Fabling

    (Ministry of Economic Development, New Zealand)

  • Arthur Grimes

    (Motu Economic & Public Policy Research)

Abstract

This paper examines the determinants of the rate of forced insolvency in New Zealand. The study incorporates two key features. First, we use regional as well as national data to explain insolvencies. The data cover six regions which have had a variety of economic experiences over the sample period (1988–2003). Second, we explain the total rate of forced insolvency in New Zealand, including both personal bankruptcies and involuntary company liquidations. We find that increases in regional economic activity and regional property values (the latter representing collateral effects) reduce regional insolvencies. An increase in credit provision (increased leverage) raises the rate of insolvencies. In a low-inflation environment, a rise in the inflation rate reduces insolvencies, but this effect disappears in a high-inflation environment. We show that interactions between economic activity, leverage and property price shocks provide a rich understanding of how region-specific shocks can compound into significant localised economic cycles.

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File URL: http://128.118.178.162/eps/dev/papers/0404/0404006.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Development and Comp Systems with number 0404006.

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Length: 44 pages
Date of creation: 13 Apr 2004
Date of revision:
Handle: RePEc:wpa:wuwpdc:0404006

Note: Type of Document - pdf; pages: 44
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Web page: http://128.118.178.162

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Keywords: Insolvency; liquidation; bankruptcy; collateral; regional economy;

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References

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  1. Bruce C. Greenwald & Joseph E. Stiglitz, 1988. "Financial Market Imperfections and Business Cycles," NBER Working Papers 2494, National Bureau of Economic Research, Inc.
  2. Jean Imbs & Haroon Mumtaz & Morten Ravn & Hélène Rey, 2005. "PPP Strikes Back: Aggregation and the Real Exchange Rate," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(1), pages 1-43, January.
  3. Platt, Harlan D. & Platt, Marjorie B., 1994. "Business cycle effects on state corporate failure rates," Journal of Economics and Business, Elsevier, Elsevier, vol. 46(2), pages 113-127, May.
  4. Richard B. Fabling & Arthur Grimes, 2007. "Practice Makes Profit: Business Practices and Firm Success," Small Business Economics, Springer, Springer, vol. 29(4), pages 383-399, December.
  5. Arthur Grimes & Suzi Kerr & Andrew Aitken, 2003. "Housing and Economic Adjustment," Urban/Regional, EconWPA 0310006, EconWPA.
  6. Gertjan W. Vlieghe, 2001. "Indicators of fragility in the UK corporate sector," Bank of England working papers, Bank of England 146, Bank of England.
  7. Mark Doms & Eric J. Bartelsman, 2000. "Understanding Productivity: Lessons from Longitudinal Microdata," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 38(3), pages 569-594, September.
  8. Wadhwani, Sushil B, 1986. "Inflation, Bankruptcy, Default Premia and the Stock Market," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 96(381), pages 120-38, March.
  9. Lewis Evans & Arthur Grimes & Bryce Wilkinson, 1996. "Economic Reform in New Zealand 1984-95: The Pursuit of Efficiency," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 34(4), pages 1856-1902, December.
  10. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195060119, October.
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Cited by:
  1. Salman, A. Khalik & von Friedrichs, Yvonne & Shukur, Ghazi, 2009. "Macroeconomic Factors and Swedish Small and Medium-Sized Manufacturing Firm Failure," Working Paper Series in Economics and Institutions of Innovation, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies 185, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
  2. David C. Maré & Michelle Poland, 2005. "Defining Geographic Communities," Working Papers, Motu Economic and Public Policy Research 05_09, Motu Economic and Public Policy Research.
  3. Arthur Grimes & Andrew Aitken, 2004. "What's the Beef with House Prices? Economic Shocks and Local Housing Markets," Working Papers, Motu Economic and Public Policy Research 04_08, Motu Economic and Public Policy Research.
  4. Arthur Grimes & Suzi Kerr & Andrew Aitken, 2005. "Bi-Directional Impacts of Economic, Social and Environmental Changes and the New Zealand Housing Market," Urban/Regional, EconWPA 0509012, EconWPA.
  5. Arthur Grimes, 2005. "Regional and Industry Cycles in Australasia: Implications for a Common Currency," Working Papers, Motu Economic and Public Policy Research 05_04, Motu Economic and Public Policy Research.
  6. Harada, Nobuyuki & Kageyama, Noriyuki, 2011. "Bankruptcy dynamics in Japan," Japan and the World Economy, Elsevier, Elsevier, vol. 23(2), pages 119-128, March.
  7. Arthur Grimes, 2005. "Intra & Inter-Regional Industry Shocks: A New Metric with an Application to Australasian Currency Union," Macroeconomics, EconWPA 0509019, EconWPA.
  8. David C. Maré, 2005. "Indirect Effects of Active Labour Market Policies," Working Papers, Motu Economic and Public Policy Research 05_01, Motu Economic and Public Policy Research.

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