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Insolvency and Economic Development: Regional Variation and Adjustment

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  • Fabling, Richard
  • Grimes, Arthur

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.

Suggested Citation

  • Fabling, Richard & Grimes, Arthur, 2004. "Insolvency and Economic Development: Regional Variation and Adjustment," Motu Working Papers 293002, Motu Economic and Public Policy Research.
    • Handle: RePEc:ags:motuwp:293002
    DOI: 10.22004/ag.econ.293002
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    Cited by:

    1. is not listed on IDEAS
    2. Grimes, Arthur & Kerr, Suzi & Aitken, Andrew, 2004. "Bi-Directional Impacts of Economic, Social and Environmental Changes and the New Zealand Housing Market," Motu Working Papers 292986, Motu Economic and Public Policy Research.
    3. Grimes, Arthur & Aitken, Andrew, 2004. "What’s the Beef with House Prices? Economic Shocks and Local Housing Markets," Motu Working Papers 292995, Motu Economic and Public Policy Research.
    4. 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 185, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    5. David C. Maré & Michelle Poland, 2005. "Defining Geographic Communities," Motu Working Papers 05_09, Motu Economic and Public Policy Research.
    6. Harada, Nobuyuki & Kageyama, Noriyuki, 2011. "Bankruptcy dynamics in Japan," Japan and the World Economy, Elsevier, vol. 23(2), pages 119-128, March.
    7. Mare, David, 2005. "Indirect Effects of Active Labour Market Policies," Motu Working Papers 292900, Motu Economic and Public Policy Research.
    8. Peter Lloyd Jones, 2011. "The determinants of aggregate creditors' voluntary liquidations," Post-Print hal-00762895, HAL.
    9. Nicolae Stef, 2017. "Bankruptcy and the difficulty of firing," Working Papers hal-04141644, HAL.
    10. Grimes, Arthur, 2005. "Regional and industry cycles in Australasia: Implications for a common currency," Journal of Asian Economics, Elsevier, vol. 16(3), pages 380-397, June.
    11. Hall, Viv & McDermott, John, 2019. "Changes in New Zealand’s Business Insolvency Rates after the GFC," Working Paper Series 8251, Victoria University of Wellington, School of Economics and Finance.
    12. Viv B. Hall & C. John McDermott, 2021. "Changes in New Zealand's business insolvency rates after the GFC," New Zealand Economic Papers, Taylor & Francis Journals, vol. 55(2), pages 173-187, May.
    13. Viv B Hall & C John McDermott, 2019. "Changes in New Zealand's Business Insolvency Rates after the Global Financial Crisis," Motu Working Papers 19_15, Motu Economic and Public Policy Research.
    14. Eric Séverin & David Veganzones, 2021. "Can earnings management information improve bankruptcy prediction models?," Annals of Operations Research, Springer, vol. 306(1), pages 247-272, November.
    15. Nicolae Stef, 2017. "Bankruptcy and the difficulty of firing," EconomiX Working Papers 2017-26, University of Paris Nanterre, EconomiX.
    16. Arthur Grimes, 2006. "Intra & inter-regional industry shocks: A new metric with application to Australasian currency union," New Zealand Economic Papers, Taylor & Francis Journals, vol. 40(1), pages 23-44.
    17. Aneta Ptak-Chmielewska & Anna Matuszyk, 2018. "The importance of financial and non-financial ratios in SMEs bankruptcy prediction," Bank i Kredyt, Narodowy Bank Polski, vol. 49(1), pages 45-62.
    18. Paul Bishop & Peter Gripaios, 2010. "Personal Insolvency in England and Wales: A Spatial Analysis," Urban Studies, Urban Studies Journal Limited, vol. 47(8), pages 1687-1702, July.
    19. Stef, Nicolae, 2018. "Bankruptcy and the difficulty of firing," International Review of Law and Economics, Elsevier, vol. 54(C), pages 85-94.

    More about this item

    Keywords

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    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure

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