A Macroeconomic Model for Analysing and Forecasting Levels of Business and Consumer Insolvency in Canada

by
Richard Archambault
(archambault.richard@ic.gc.ca)
Dominic Laverdière
(laverdiere.dominic@ic.gc.ca)

Economic Information and Analysis
Office of the Superintendent of Bankruptcy
Industry Canada

Table of contents

1. Introduction

2. Literature review

• 2.1 Consumer insolvency
• 2.2 Business insolvency

3. The determinants selected to develop the models

• 3.1 The determinants selected for the consumer model
• 3.2 The determinants selected for the business model

4. Results

• 4.1 Data source
• 4.2 Defining the models
• 4.3 Estimating, forecasting and model assessment criteria
• 4.4 Analysing the results

5. Statistical inference

• 5.1 Simulating the impact of a one-percentage-point increase in the exogenous variables

6. Conclusion

Bibliography

Appendices

We would like to thank the participants at the "Risque de défaut et stabilité financière" [default risk and financial stability] session at the 44^th convention of the Société canadienne de science économique (SCSE), as well as the participants at the seminar held at the Bank of Canada on January 20^th 2005 for their many comments.

Note:
The views expressed in this document are the authors’ and do not necessarily reflect the opinions of Industry Canada or of the federal government.

Abstract

The main purpose of this document is to improve our understanding of the macroeconomic factors responsible for the increase in insolvency in Canada so as to be more able to predict how this will change in the future. On the basis of the existing literature, the authors developed one model for consumer insolvency and another for business insolvency.

Different statistical criteria were used to select each of the models. The results obtained with the models suggest that the debt-to-income ratio is the determinant having the greatest influence on the increase in consumer insolvency for the 1987–2003 period. In the case of business insolvency, it seems that the drop in interest rates was the main reason for the decrease in this type of insolvency between 1996 and 2003. The average forecasting error one year ahead for the consumer and business insolvency models is 3.6% in both cases.