Zombies and the Process of Creative Destruction
RBI Bulletin, 76(2), 53-66, 2022
17 Pages Posted: 6 Apr 2022
Date Written: February 16, 2022
The Schumpeterian creative destruction process requires a dynamic reallocation of resources from weak and vulnerable firms to strong firms having high growth potential. Zombie firms that often survive longer than desirable taking advantage of countercyclical policy support, however, tend to thwart that process. Using firm-level data for India this article finds that monetary policy does not hinder the creative destruction process by misallocating credit flows to zombies during periods of economic slowdown, but zombies seem to have dampened the effectiveness of monetary policy at the margin as they use borrowed resources more for their survival than for undertaking new investment.
Keywords: Zombie firms, monetary policy, bank credit, investment
JEL Classification: E51, E52, D25, R42
Suggested Citation: Suggested Citation