IDEAS home Printed from https://ideas.repec.org/p/boe/boeewp/146.html
   My bibliography  Save this paper

Indicators of fragility in the UK corporate sector

Author

Listed:
  • Gertjan W. Vlieghe

Abstract

The determinants of the aggregate corporate liquidation rate in the United Kingdom are estimated from a sample of quarterly data using an autoregressive distributed lag (ARDL) approach which allows for non-stationarity of the variables. The paper investigates what the appropriate measures of indebtedness are, and examines whether the unprecedented spike in the corporate liquidation rate in the United Kingdom in 1992 caused a breakdown in the relationship between the variables. The debt-to-GDP ratio, the real interest rate, deviations of GDP from trend and real wages are found to be long-run determinants of the liquidation rate. The birth rate of new companies, an index of property prices and nominal interest rates have significant short-term effects. The estimated equation is robust to changes in the sample period. The rapidly increasing level of indebtedness in the late 1980s was the main determinant of the subsequent increase in the liquidation rate. The decrease in the liquidation rate after 1992 was primarily due to lower real interest rates, lower real wages and the cyclical recovery of GDP.

Suggested Citation

  • Gertjan W. Vlieghe, 2001. "Indicators of fragility in the UK corporate sector," Bank of England working papers 146, Bank of England.
    • Handle: RePEc:boe:boeewp:146
    as

    Download full text from publisher

    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2001/wp146.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Mark Gertler, 1988. "Financial structure and aggregate economic activity: an overview," Proceedings, Federal Reserve Bank of Cleveland, pages 559-596.
    2. Michael D. Bordo & Michael J. Dueker & David C. Wheelock, 2002. "Aggregate Price Shocks and Financial Instability: A Historical Analysis," Economic Inquiry, Western Economic Association International, vol. 40(4), pages 521-538, October.
    3. Pesaran, M.H. & Shin, Y., 1995. "An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis," Cambridge Working Papers in Economics 9514, Faculty of Economics, University of Cambridge.
    4. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-248, April.
    5. N. Gregory Mankiw, 1986. "The Allocation of Credit and Financial Collapse," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 455-470.
    6. Mishkin, Frederic S., 1978. "The Household Balance Sheet and the Great Depression," The Journal of Economic History, Cambridge University Press, vol. 38(4), pages 918-937, December.
    7. Young, Garry, 1995. "Company Liquidations, Interest Rates and Debt," The Manchester School of Economic & Social Studies, University of Manchester, vol. 63(0), pages 57-69, Suppl..
    8. Scott, James, 1981. "The probability of bankruptcy: A comparison of empirical predictions and theoretical models," Journal of Banking & Finance, Elsevier, vol. 5(3), pages 317-344, September.
    9. Ben Bernanke & Mark Gertler, 1990. "Financial Fragility and Economic Performance," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 87-114.
    10. Wadhwani, Sushil B, 1986. "Inflation, Bankruptcy, Default Premia and the Stock Market," Economic Journal, Royal Economic Society, vol. 96(381), pages 120-138, March.
    11. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    12. Dwight M. Jaffee & Thomas Russell, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 651-666.
    13. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, September.
    14. Davis, E P, 1992. "Credit Quality Spreads, Bond Market Efficiency and Financial Fragility," The Manchester School of Economic & Social Studies, University of Manchester, vol. 60(0), pages 21-46, Supplemen.
    15. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
    16. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
    17. Platt, Harlan D. & Platt, Marjorie B., 1994. "Business cycle effects on state corporate failure rates," Journal of Economics and Business, Elsevier, vol. 46(2), pages 113-127, May.
    18. Qaizar Hussain & Clas Wihlborg, 1999. "Corporate Insolvency Procedures and Bank Behavior; A Study of Selected Asian Economies," IMF Working Papers 99/135, International Monetary Fund.
    19. Cuthbertson, Keith & Hudson, John, 1996. "The Determinants of Compulsory Liquidation in the U.K," The Manchester School of Economic & Social Studies, University of Manchester, vol. 64(3), pages 298-308, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. David Aikman & Piergiorgio Alessandri & Bruno Eklund & Prasanna Gai & Sujit Kapadia & Elizabeth Martin & Nada Mora & Gabriel Sterne & Matthew Willison, 2011. "Funding Liquidity Risk in a Quantitative Model of Systemic Stability," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.),Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 12, pages 371-410, Central Bank of Chile.
    2. Fabling, Richard & Grimes, Arthur, 2005. "Insolvency and economic development: Regional variation and adjustment," Journal of Economics and Business, Elsevier, vol. 57(4), pages 339-359.
    3. John Whitley & Richard Windram, 2003. "A quantitative framework for commercial property and its relationship to the analysis of the financial stability of the corporate sector," Bank of England working papers 207, Bank of England.
    4. Dua, Pami & Kapur, Hema, 2018. "Macro stress testing and resilience assessment of Indian banking," Journal of Policy Modeling, Elsevier, vol. 40(2), pages 452-475.
    5. Bergin, Adele & Conroy, Niall & Garcia Rodriguez, Abian & Holland, Dawn & McInerney, Niall & Morgenroth, Edgar & Smith, Donal, 2017. "COSMO: A new COre Structural MOdel for Ireland," Papers WP553, Economic and Social Research Institute (ESRI).
    6. Salnikov, V. & Mogilat, A. & Maslov, I., 2012. "Stress Testing for Russian Real Sector: First Approach," Journal of the New Economic Association, New Economic Association, vol. 16(4), pages 46-70.
    7. Hunter, John & Isachenkova, Natalia, 2006. "Aggregate economy risk and company failure: An examination of UK quoted firms in the early 1990s," Journal of Policy Modeling, Elsevier, vol. 28(8), pages 911-919, November.
    8. Virolainen, Kimmo, 2004. "Macro stress testing with a macroeconomic credit risk model for Finland," Research Discussion Papers 18/2004, Bank of Finland.
    9. Harada, Nobuyuki & Kageyama, Noriyuki, 2011. "Bankruptcy dynamics in Japan," Japan and the World Economy, Elsevier, vol. 23(2), pages 119-128, March.
    10. Nico Dewaelheyns & Cynthia Hulle, 2008. "Legal reform and aggregate small and micro business bankruptcy rates: evidence from the 1997 Belgian bankruptcy code," Small Business Economics, Springer, vol. 31(4), pages 409-424, December.
    11. Glenn Hoggarth & Steffen Sorensen & Lea Zicchino, 2005. "Stress tests of UK banks using a VAR approach," Bank of England working papers 282, Bank of England.
    12. Petr Jakubík, 2007. "Credit Risk and the Finnish Economy," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 1(3), pages 254-285, November.
    13. Robert Kelly & Eoin Brien & Rebecca Stuart, 2015. "A long-run survival analysis of corporate liquidations in Ireland," Small Business Economics, Springer, vol. 44(3), pages 671-683, March.
    14. Dietske Simons & Ferdinand Rolwes, 2009. "Macroeconomic efault Modeling and Stress Testing," International Journal of Central Banking, International Journal of Central Banking, vol. 5(3), pages 177-204, September.
    15. 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.
    16. N. Dewaelheyns & C. van Hulle, 2007. "Aggregate Bankruptcy Rates and the Macroeconomic Environment. Forecasting Systematic Probabilities of Default," Review of Business and Economic Literature, KU Leuven, Faculty of Economics and Business (FEB), Review of Business and Economic Literature, vol. 0(4), pages 541-566.
    17. Sorge, Marco & Virolainen, Kimmo, 2006. "A comparative analysis of macro stress-testing methodologies with application to Finland," Journal of Financial Stability, Elsevier, vol. 2(2), pages 113-151, June.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:146. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Digital Media Team). General contact details of provider: http://edirc.repec.org/data/boegvuk.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.