Company bankruptcies and births matter

Abstract

This paper constructs a simple supply orientated model of the economy in which company bankruptcies which lead to a loss of capital and births have impacts on macroeconomic variables. Bankruptcies will reduce output, increase unemployment, worsen the balance of payments and also impact upon inflation. Empirical work based on data from both the USA and the UK finds a significant Granger causality relationship between bankruptcies and births and these four macroeconomic variables. The standard Granger causality regression is supplemented by non-linear Granger causality tests.