A Model of Zombie Firms and the Perils of Negative Real Interest Rates

Guillaume Rocheteau

Journal of Political Economy Macroeconomics, 2024, vol. 2, issue 2, 272 - 335

Abstract: I develop a continuous-time, competitive model of zombie firms—firms with negative fundamental values but positive market prices. Firms finance negative cash flows by issuing equity shares that are acquired by households that lack commitment but want to self-insure against idiosyncratic shocks. I study the conditions under which zombies emerge and the implications for asset prices, volatility, output, and firm dynamics. I describe a recession that turns healthy firms into zombies, its cleansing effect, and the recovery path. I introduce firm heterogeneity by formalizing the life cycle of zombies and show that equilibria with zombies exist for plausible parameter values.

Date: 2024
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