Zombie Lending and Policy Traps

Viral Acharya, Simone Lenzu and Olivier Wang

No 16658, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We model how accommodative policy can become trapped due to credit misallocation and its spillovers, as witnessed in Japan in the 1990s and in Europe in the 2010s. Following large negative shocks, the eective lower bound prevents stimulating bank lending through rate cuts. Unconventional policies that subsidize risk-taking such as regulatory forbearance can still expand credit, but excessive accommodation induces poorly-capitalized banks to lend to low-productivity “zombie†rms. Due to persistent congestion externalities of zombie lending on healthier rms, policymakers avoiding short-term recessions can get trapped into protracted low rates, excessive forbearance, and persistent output losses.

Keywords: Bank capital; Credit misallocation; Evergreening; Forbearance; Conventional and unconventional monetary policy (search for similar items in EconPapers)
JEL-codes: E44 E52 G21 G28 (search for similar items in EconPapers)
Date: 2021-10
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Citations: View citations in EconPapers (2)

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