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Insolvency and Economic Development: Regional Variation and Adjustment

  • Richard Fabling


    (Ministry of Economic Development)

  • Arthur Grimes


    (Motu Economic and Public Policy Research)

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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Paper provided by Motu Economic and Public Policy Research in its series Working Papers with number 03_18.

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Length: 44 pages
Date of creation: Feb 2004
Date of revision:
Handle: RePEc:mtu:wpaper:03_18
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  1. Wadhwani, Sushil B, 1986. "Inflation, Bankruptcy, Default Premia and the Stock Market," Economic Journal, Royal Economic Society, vol. 96(381), pages 120-38, March.
  2. Arthur Grimes & Suzi Kerr & Andrew Aitken, 2003. "Housing and Economic Adjustment," Urban/Regional 0310006, EconWPA.
  3. Jean Imbs & Haroon Mumtaz & Morton O. Ravn & Helene Rey, 2002. "PPP Strikes Back: Aggregation and the Real Exchange Rate," NBER Working Papers 9372, National Bureau of Economic Research, Inc.
  4. Gertjan W. Vlieghe, 2001. "Indicators of fragility in the UK corporate sector," Bank of England working papers 146, Bank of England.
  5. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
  6. 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.
  7. Mark Doms & Eric J. Bartelsman, 2000. "Understanding Productivity: Lessons from Longitudinal Microdata," Journal of Economic Literature, American Economic Association, vol. 38(3), pages 569-594, September.
  8. Richard B. Fabling & Arthur Grimes, 2007. "Practice Makes Profit: Business Practices and Firm Success," Small Business Economics, Springer, vol. 29(4), pages 383-399, December.
  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, vol. 34(4), pages 1856-1902, December.
  10. Greenwald, Bruce C & Stiglitz, Joseph E, 1993. "Financial Market Imperfections and Business Cycles," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 77-114, February.
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