IMF Working Papers

The Zombie Lending Channel of Monetary Policy

By Bruno Albuquerque, Chenyu Mao

September 15, 2023

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Bruno Albuquerque, and Chenyu Mao. The Zombie Lending Channel of Monetary Policy, (USA: International Monetary Fund, 2023) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Bond yields, Credit, Financial institutions, Financial services, Loans, Money, Sovereign bonds, Yield curve

Keywords: Bond yields, Corporate investment, Credit, Global, Loans, Monetary policy, Monetary policy shock, Monetary policy to nonfinancial corporate, Sovereign bonds, Yield curve, Zombie definition, Zombie firm, Zombie firms, Zombie lending, Zombie lending channel

Publication Details

  • Pages:

    62

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2023/192

  • Stock No:

    WPIEA2023192

  • ISBN:

    9798400253744

  • ISSN:

    1018-5941

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