The Zombie Lending Channel of Monetary Policy

Bruno Albuquerque and Chenyu Mao

No 2023/192, IMF Working Papers from International Monetary Fund

Abstract: We uncover a new channel—the zombie lending channel—in the transmission of monetary policy to nonfinancial corporates. This channel originates from the presence of unviable and unproductive (zombie) firms. We identify exogenous variation in monetary conditions around the world by exploiting the international transmission of US monetary policy shocks. We find that tighter monetary policy leads to more favorable credit conditions for zombie firms relative to other firms. Zombies are then able to cut investment and employment by relatively less. This is indicative of evergreening motives by lenders when interest rates rise: lenders face incentives to restructure existing loans of zombie firms to avoid the realization of losses on their balance sheets. Policies that strengthen banks’ balance sheets, that limit banks’ incentives to engage in risky behavior, and laws that allow an efficient resolution of weak firms, may help mitigate zombie lending practices when financial conditions tighten.

Keywords: Monetary policy; Corporate investment; Zombie firms; Zombie lending; zombie lending channel; monetary policy shock; zombie firm; monetary policy to nonfinancial corporate; zombie definition; Bond yields; Yield curve; Loans; Credit; Sovereign bonds; Global (search for similar items in EconPapers)
Pages: 62
Date: 2023-09-15
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg and nep-mon
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