Too Low for Too Long: Could Extended Periods of Ultra Easy Monetary Policy Have Harmful Effects?

TooLowforTooLong CouldExtendedPeriodsofUltraEasyMonetaryPolicyHaveHarmfulEffects? EtibarJafarovandEnricoMinnella WP/23/105 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2023 MAY ©2023InternationalMonetaryFundWP/23/105 IMFWorkingPaper WesternHemisphereDepartment TooLowforTooLong.CouldExtendedPeriodsofUltraEasyMonetaryPolicyHaveHarmfulEffects? PreparedbyEtibarJafarovandEnricoMinnella* AuthorizedfordistributionbyMauricioVillafuerteMay2023 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:Extendedperiodsofultra-easymonetarypolicyinadvancedeconomieshaverekindleddebatesaboutthezombificationofweakcompaniesanditsimpactonresourceallocation,economicgrowth,inflation,andfinancialstability.Usingbothfirm-levelandmacroeconomicdata,wefindthatrecessionsareacriticalfactorintherapidincreaseinthenumberofzombiefirms.Expansionarymonetarypolicycanhelpreducezombificationwheninterestratesareatthezerolowerbound(ZBL),butatoo-accommodativemonetarypolicyforextendedperiodsisassociatedwithahigherprobabilityofzombification.Smallandmediumenterprisesaremorelikelytobecomezombiefirms.Thisraisesconcernsaboutthesustainabilityoftoo-easymonetarypolicyimplementation,especiallyincountrieswheregrowthislackluster.Ourfindingsimplyatradeoffbetweenconductingacountercyclicalmonetarypolicy,whichalsohelpscontaintheincreaseinthenumberofzombiefirmsincyclicaldownturns,andusinganexpansionarymonetarypolicyforlongperiods,whichmayleadtoacombinationoflowinterestrates,lowgrowth,andhighfinancialvulnerability.Suchatradeoffisnotaconcerncurrentlywhenmostcountriesaretighteningtheirmonetarypolicystance,butpolicymakersshouldbemindfulofitduringfuturerecessions. JELClassificationNumbers: E52,G4;H81;O42,O47 Keywords: TooLowforTooLong;ZombieFirms;FinancialStability Author’sE-MailAddress: EJafarov@imf.org;enrico.minnella@uniroma2.it *TheauthorswouldliketothankMauricioVillafuerteandGustavoAdlerforsupportingthisresearchproject.WewouldalsoliketothankFumitakaNakamura,FuadHasanov,SamuelPienknagura,BeniaminoPisicoli,IreneRizzoli,TammaroTerracciano,VassiliBazinas,FrankWu,GianluigiFerrucci,JoseffPlatzer,FranciscoRoch,PurvaKhera,andSalihFendogluaswellasparticipantsatseveralIMFseminarsfortheirvaluablecomments.Finally,theauthorswouldlikeNicolasLandetaandDariaKolpakovafortheirexcellentorganizationalandresearchsupport.Allremainingerrorsareours. WORKINGPAPERS TooLowforTooLong CouldExtendedPeriodsofUltraEasyMonetaryPolicyHaveHarmfulEffects? PreparedbyEtibarJafarovandEnricoMinnella1 1“TheauthorswouldliketothankMauricioVillafuerteandGustavoAdlerforsupportingthisresearchproject.WewouldalsoliketothankFumitakaNakamura,FuadHasanov,SamuelPienknagura,BeniaminoPisicoli,IreneRizzoli,TammaroTerracciano,VassiliBazinas,FrankWu,GianluigiFerrucci,JoseffPlatzer,FranciscoRoch,PurvaKhera,andSalihFendogluaswellasparticipantsatseveralIMFseminarsfortheirvaluablecomments.Finally,theauthorswouldlikeNicolasLandetaandDariaKolpakovafortheirexcellentorganizationalandresearchsupport.Allremainingerrorsareours. Contents Introduction3 EmpiricalAnalysisofZombification5 Stylizedfacts5 MonetaryPolicyandZombification9 Microdata9 Macrodata11 MonetaryPolicy:TooLowforTooLong12 ZombificationandEconomicGrowth15 ImpactonGrowth15 SpilloverEffects18 FinancialStabilityAspects20 Conclusion22 Appendix24 References26 FIGURES 1:ShareofZombiesandtheShadowRate7 2:ZombievsNon-zombiePerformance8 3:ZombieshareinSMEsvs.LargeEnterprises9 4:VariablesofthePanelVAR16 5:ImpulseResponseFunctions-ZombieShareShock17 6:ForecastErrorVarianceDecompositionoftheOutputGap18 7:Sectoralzombiesharesandeconomicperformance19 8:MonetaryPolicyandBankLendingStandardsintheU.S22 TABLES 1:ProbabilityofBeingaZombieFirmduringRecessionsandattheZLB11 2:EffectofMacroeconomicVariablesontheCountry-specificZombieShares12 3:ProbabilityofBeingaZombieFirmDuringLongPeriodsofLowInterestRate14 4:TooLowforTooLong-SaturatedSpecification15 5:SpilloverstoNon-zombieFirms20 Introduction DuringtheGlobalFinancialCrisisin2008andtheCOVID-19pandemicinearly2020,thecentralbanksofadvancedeconomiesloweredpolicyrateseffectivelytothezerolowerbound(ZLB)andconductedultra-easymonetarypolicyforextendedperiods,includingtheso-calledunconventionalmonetarypolicy(UMP)operations.Theviewthatsuchpolicieshelpedtoavoidafinancialmeltdownandcloseoutputandinflationgapshasbroadsupport,buttherehavealsobeenconcernsinsomequartersthatultra-easymonetarypolicyisnota“freelunch.”Inparticular,therehavebeensuggestionsthatultra-easymonetarypolicyforlongperiodscouldleadtounsustainablecapitalflowsandboomsinhousingandfinancialassetprices,thusraisingtheoddsofafuturefinancialcrisis(IMF,IEO,2019)andsupportingweakcompaniesatthecostof