The Zombie Lending Channel of Monetary Policy
IMF Working Papers, September 15, 2023
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- The Zombie Lending Channel of Monetary Policy
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Bibliographic details
- Authors: Bruno Albuquerque, Chenyu Mao
- Published: September 15, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400253744.001
Authors and Publication
- By Bruno Albuquerque, Chenyu Mao
- September 15, 2023
- Pages: 62
- Volume: 2023
- Issue: 192
- Series: Working Paper No. 2023/192
- DOI: https://doi.org/10.5089/9798400253744.001
- Stock No: WPIEA2023192
- ISBN: 9798400253744
- ISSN: 1018-5941
Research Question and Identification
- Uncovers a new transmission channel of monetary policy to nonfinancial corporates: the "zombie lending channel."
- Identification strategy: exploits exogenous variation in monetary conditions around the world by leveraging the international transmission of US monetary policy shocks.
Key Findings
- Tighter monetary policy leads to more favorable credit conditions for zombie firms relative to other firms.
- Zombie firms (unviable and unproductive) are able to cut investment and employment by relatively less when monetary policy tightens.
- The observed pattern is indicative of evergreening motives by lenders when interest rates rise: lenders restructure existing loans of zombie firms to avoid realization of losses on their balance sheets.
Mechanism and Interpretation
- Presence of zombie firms creates incentives for lenders to avoid recognizing loan losses.
- Lenders respond to tighter monetary conditions by providing comparatively favorable credit treatment to zombie firms to postpone or prevent loan write-downs.
Policy Implications and Recommendations
- Policies that strengthen banks’ balance sheets may reduce incentives for zombie lending.
- Measures that limit banks’ incentives to engage in risky behavior can help mitigate evergreening practices.
- Laws that allow an efficient resolution of weak firms may help prevent the propagation of zombie lending practices when financial conditions tighten.
Subjects and Keywords
- 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
IMF Working Papers. The Zombie Lending Channel of Monetary Policy, Bruno Albuquerque and Chenyu Mao, Working Paper No. 2023/192 (September 15, 2023).
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