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Zombie Lending and Policy Traps

Author

Listed:
  • Viral V. Acharya
  • Simone Lenzu
  • Olivier Wang

Abstract

We model how accommodative policy can become trapped due to credit misallocation and its spillovers, as witnessed in Japan in the 1990s and in Europe in the 2010s. Following large negative shocks, the effective lower bound prevents stimulating bank lending through rate cuts. Unconventional policies that subsidize risk-taking such as regulatory forbearance can still expand credit, but excessive accommodation induces poorly-capitalized banks to lend to low-productivity “zombie” rms. Due to persistent congestion externalities of zombie lending on healthier rms, policymakers avoiding short-term recessions can get trapped into protracted low rates, excessive forbearance, and persistent output losses.

Suggested Citation

  • Viral V. Acharya & Simone Lenzu & Olivier Wang, 2021. "Zombie Lending and Policy Traps," NBER Working Papers 29606, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29606
    Note: CF EFG ME
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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