We examine the interactions between business failures and macroe-conomic aggregates, and specifically the accounts of policy-inducedchanges in the macroeconomy for the observed fluctuations of UKbusiness failures in the period 1966–2003 using the vector error-correction model (VECM). The results demonstrate that macro-economic aggregates, i.e., interest rate, credit, profits, inflation andbusiness births, exert differential impacts on business failures bothin the short run and in the long run. The study reveals that structuralchanges in the financial and real sectors during the examined periodhave made an impact on the way in which the macroeconomy affectsbusiness failures. In particular, business failures are increasinglyreacting to monetary policy changes in the post-1980 period. Further-more, the shocks to business failures can generate large fluctuations inmacroeconomic aggregates, suggesting the importance of corporatebalance sheets in financial stability and economic growth. The paper’sfindings carry policy implications that are related to the survival offirms in distress and finance-driven business cycles.
- business failures
- structural changes