IMF Working Papers

Too Low for Too Long: Could Extended Periods of Ultra Easy Monetary Policy Have Harmful Effects?

Author/Editor:

Etibar Jafarov ; Enrico Minnella

Publication Date:

May 19, 2023

Electronic Access:

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Summary:

Extended periods of ultra-easy monetary policy in advanced economies have rekindled debates about the zombification of weak companies and its impact on resource allocation, economic growth, inflation, and financial stability. Using both firm-level and macroeconomic data, we find that recessions are a critical factor in the rapid increase in the number of zombie firms. Expansionary monetary policy can help reduce zombification when interest rates are at the zero lower bound (ZBL), but a too-accommodative monetary policy for extended periods is associated with a higher probability of zombification. Small and medium enterprises are more likely to become zombie firms. This raises concerns about the sustainability of too-easy monetary policy implementation, especially in countries where growth is lackluster. Our findings imply a tradeoff between conducting a countercyclical monetary policy, which also helps contain the increase in the number of zombie firms in cyclical downturns, and using an expansionary monetary policy for long periods, which may lead to a combination of low interest rates, low growth, and high financial vulnerability. Such a tradeoff is not a concern currently when most countries are tightening their monetary policy stance, but policymakers should be mindful of it during future recessions.

Series:

Working Paper No. 2023/105

Subject:

Economic growth Economic recession Financial crises Global financial crisis of 2008-2009 Monetary expansion Monetary policy Output gap Production Unconventional monetary policies

Frequency:

regular