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Dr Jia Liu, Salford Business School, The University of Salford, Greater Manchester, M5 4WT, UK. Tel: +44(0)161-2952981; Fax: +44(0)161-2954947; Email: The author wishes to thank the editor, Gabriel Talmain, and an anonymous referee for criticism and suggestions leading to substantial improvements of this paper. The paper has benefited from the comments of session participants at the 2005 European Financial Management Annual Conference, Italy, and seminar audiences at the University of Anglia, the University of Bath and the University of Glasgow. I am greatly indebted to Dong Pang for his excellent research assistance and technical support. Any remaining errors or omissions are my responsibility.


We examine the interactions between business failures and macroeconomic aggregates, and specifically the accounts of policy-induced changes in the macroeconomy for the observed fluctuations of UK business failures in the period 1966–2003 using the vector error-correction model (VECM). The results demonstrate that macroeconomic aggregates, i.e., interest rate, credit, profits, inflation and business births, exert differential impacts on business failures both in the short run and in the long run. The study reveals that structural changes in the financial and real sectors during the examined period have made an impact on the way in which the macroeconomy affects business failures. In particular, business failures are increasingly reacting to monetary policy changes in the post-1980 period. Furthermore, the shocks to business failures can generate large fluctuations in macroeconomic aggregates, suggesting the importance of corporate balance sheets in financial stability and economic growth. The paper's findings carry policy implications that are related to the survival of firms in distress and finance-driven business cycles.