Zombie Lending and Policy Traps /
Acharya, Viral V.
Zombie Lending and Policy Traps / Viral V. Acharya, Simone Lenzu, Olivier Wang. - Cambridge, Mass. National Bureau of Economic Research 2021. - 1 online resource: illustrations (black and white); - NBER working paper series no. w29606 . - Working Paper Series (National Bureau of Economic Research) no. w29606. .
December 2021.
We build a model with heterogeneous firms and banks to analyze how policy affects credit allocation and long-term economic outcomes. When firms are hit by small negative shocks, conventional monetary policy can restore efficient bank lending and production by lowering interest rates. Large shocks, however, necessitate unconventional policy such as regulatory forbearance towards banks to stabilize the economy. Aggressive accommodation runs the risk of introducing zombie lending and a "diabolical sorting", whereby low-capitalization banks extend new credit or evergreen existing loans to low-productivity firms. If shocks reduce the profitability gap between healthy and zombie firms, the optimal forbearance policy is non-monotone in the size of the shock. In a dynamic setting, policy aimed at avoiding short-term recessions can be trapped into protracted low rates and excessive forbearance, due to congestion externalities imposed by zombie lending on healthier firms. The resulting economic sclerosis delays the recovery from transitory shocks, and can even lead to permanent output losses.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.
Financial Markets and the Macroeconomy
Monetary Policy
Financial Crises
Banks • Depository Institutions • Micro Finance Institutions • Mortgages
Government Policy and Regulation
Bankruptcy • Liquidation
Zombie Lending and Policy Traps / Viral V. Acharya, Simone Lenzu, Olivier Wang. - Cambridge, Mass. National Bureau of Economic Research 2021. - 1 online resource: illustrations (black and white); - NBER working paper series no. w29606 . - Working Paper Series (National Bureau of Economic Research) no. w29606. .
December 2021.
We build a model with heterogeneous firms and banks to analyze how policy affects credit allocation and long-term economic outcomes. When firms are hit by small negative shocks, conventional monetary policy can restore efficient bank lending and production by lowering interest rates. Large shocks, however, necessitate unconventional policy such as regulatory forbearance towards banks to stabilize the economy. Aggressive accommodation runs the risk of introducing zombie lending and a "diabolical sorting", whereby low-capitalization banks extend new credit or evergreen existing loans to low-productivity firms. If shocks reduce the profitability gap between healthy and zombie firms, the optimal forbearance policy is non-monotone in the size of the shock. In a dynamic setting, policy aimed at avoiding short-term recessions can be trapped into protracted low rates and excessive forbearance, due to congestion externalities imposed by zombie lending on healthier firms. The resulting economic sclerosis delays the recovery from transitory shocks, and can even lead to permanent output losses.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.
Financial Markets and the Macroeconomy
Monetary Policy
Financial Crises
Banks • Depository Institutions • Micro Finance Institutions • Mortgages
Government Policy and Regulation
Bankruptcy • Liquidation