Zombie Lending and Policy Traps
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.
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Copy CitationViral V. Acharya, Simone Lenzu, and Olivier Wang, "Zombie Lending and Policy Traps," NBER Working Paper 29606 (2021), https://doi.org/10.3386/w29606.Download Citation
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