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Insolvency and Economic Development:Regional Variation and Adjustment

Author

Listed:
  • 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.

Suggested Citation

  • Richard Fabling & Arthur Grimes, 2004. "Insolvency and Economic Development:Regional Variation and Adjustment," Development and Comp Systems 0404006, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpdc:0404006
    Note: Type of Document - pdf; pages: 44
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/dev/papers/0404/0404006.pdf
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    References listed on IDEAS

    as
    1. Jean Imbs & Haroon Mumtaz & Morten O. Ravn & Hélène Rey, 2005. "PPP Strikes Back: Aggregation And the Real Exchange Rate," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(1), pages 1-43.
    2. 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.
    3. Arthur Grimes & Suzi Kerr & Andrew Aitken, 2003. "Housing and Economic Adjustment," Working Papers 03_09, Motu Economic and Public Policy Research.
    4. 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.
    5. 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.
    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. Bruce C. Greenwald & Joseph E. Stiglitz, 1993. "Financial Market Imperfections and Business Cycles," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(1), pages 77-114.
    8. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
    9. Wadhwani, Sushil B, 1986. "Inflation, Bankruptcy, Default Premia and the Stock Market," Economic Journal, Royal Economic Society, vol. 96(381), pages 120-138, March.
    10. Gertjan W. Vlieghe, 2001. "Indicators of fragility in the UK corporate sector," Bank of England working papers 146, Bank of England.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Nicolae Stef, 2017. "Bankruptcy and the difficulty of firing," EconomiX Working Papers 2017-26, University of Paris Nanterre, EconomiX.
    2. Harada, Nobuyuki & Kageyama, Noriyuki, 2011. "Bankruptcy dynamics in Japan," Japan and the World Economy, Elsevier, vol. 23(2), pages 119-128, March.
    3. 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.
    4. Michelle Poland & David C Maré, 2005. "Defining Geographic Communities," Urban/Regional 0509016, University Library of Munich, Germany.
    5. Arthur Grimes & Suzi Kerr & Andrew Aitken, 2004. "Bi-Directions Impacts of Economic, Social and Environmental Changes and the New Zealand Housing Market," Working Papers 04_09, Motu Economic and Public Policy Research.
    6. 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.
    7. 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.
    8. 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.
    9. Arthur Grimes & Andrew Aitken, 2004. "What's the Beef with House Prices? Economic Shocks and Local Housing Markets," Working Papers 04_08, Motu Economic and Public Policy Research.
    10. Nicolae Stef, 2017. "Bankruptcy and the difficulty of firing," Working Papers hal-04141644, HAL.
    11. 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.
    12. David C Maré, 2005. "Indirect Effects of Active Labour Market Policies," HEW 0509004, University Library of Munich, Germany.
    13. Stef, Nicolae, 2018. "Bankruptcy and the difficulty of firing," International Review of Law and Economics, Elsevier, vol. 54(C), pages 85-94.
    14. Peter Lloyd Jones, 2011. "The determinants of aggregate creditors' voluntary liquidations," Post-Print hal-00762895, HAL.
    15. 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.
    16. Viv B Hall & C John McDermott, 2019. "Changes in New Zealand’s Business Insolvency Rates after the Global Financial Crisis," Working Papers 19_15, Motu Economic and Public Policy Research.
    17. 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.

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    More about this item

    Keywords

    Insolvency; liquidation; bankruptcy; collateral; regional economy;
    All these keywords.

    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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