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Bank of Finland Research Discussion Papers, Bank of Finland

No 25/1992:
Bankruptcies and Aggregate Economic Fluctuations

Christian Starck and Matti Viren ()

Abstract: This paper explores the determinants of aggregate economic fluctuations in Finland. The analysis makes use of aggregate monthly time series for some financial and non-financial variables covering the period 19221990. In particular, we scrutinize the role of bankruptcies in the propagation mechanism of aggregate economic shocks. In analyzing the role of bankruptcies we also try to find out whether money or credit helps more in predicting the movements in corporate failures and overall economic activity. The empirical analyses indicate that bankruptcies constitute an important ingredient as regards the determination of other variables. It also turns out that overall liquidity and firm failures are closely related. In comparing money and credit the former appears to be much more important as regards the propagation mechanism. We also find that the basic relationships are strikingly stable over long periods. Finally, we find some evidence of non-linearities in the financial and non-financial time series.

Keywords: business cycles; bankruptcy; time series models; (follow links to similar papers)

19 pages, September 8, 1992

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