The objective of the paper is to investigate the interaction between macroeconomic cycles and microeconomic shocks, focusing on the firm level. In particular we consider how the financial fragility of firms affects the business cycle, which may itself determine the financial situation of firms. Such a question is in particular relevant in two areas: first in terms of macroeconomic forecasting with a view to incorporating information at the microeconomic level; second, for the implementation of stress tests where one considers the response of the financial sector to large macroeconomic shocks.
As usually acknowledged, the drawback of the latter approach is that these tests are usually carried out in a static way, omitting the socalled second round effects of the shocks to the real economy : a given initial macroeconomic shock impacts on the financial situation of firms, which then affects macroeconomic variables. The contribution of the paper is therefore to study the transmission of shocks, and in particular those measuring financial fragility, as defined by the likelihood of corporate defaults.
Here we consider two strands of the literature. First, several papers investigate how financial variables and in particular the financial situation of corporate firms affect the business cycle, in the line of Bernanke and Gertler (1989). Among others, Lown and Morgan (2006) provide evidence that indicators of financial fragility, as measured by business failure rates, together with credit standards have explanatory power for future growth of bank loans and GDP, on top of standard measures of interest rates on loans. Second, there is a growing literature on the impact of macroeconomic variables on corporate defaults (Bordes and Melitz, 1991, Allen and Saunders, 2004, Misiona and Tessier, 2007). Some of them also consider dynamic feedback relationships, as Koopman and Lucas (2003).
Carling et al. (2004, 2007) also investigate these issues in the case of the corporate sector in Sweden; they estimate current year or one year ahead default equations for individual firms and measure the effect of the aggregate default probability in a VAR model which also includes output, inflation, the nominal interest rate and the exchange rate. Our study is close in spirit to their approach, but we provide several extensions. We develop a similar analysis in the case of France, using the Banque de France FIBEN database.
In addition we rely on the Shumwayps (2001) duration model, which allows to estimate the relationship between macroeconomic variables and defaults over several periods and not only period'by'period. Such models provide more reliable estimates of default probabilities than the usual LOGIT models, since they take into account the progressive deterioration of financial conditions in the corporate sector.
The paper is organized as follows. In section 2 we explain our modelling choices. In section 3 we present the data and the main results we obtain about the bilateral effects of macroeconomic conditions on bankruptcies. Variant scenarios and stress tests are considered in section 4. Section 5 concludes.
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