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

32 Pages Posted: 2 Jun 2023

See all articles by Etibar Jafarov

Etibar Jafarov

International Monetary Fund - European Department

Enrico Minnella

University of Rome Tor Vergata - Department of Economics and Finance

Abstract

Extended periods of ultra-easy monetary policy in advanced economies have rekindled debates about the zombification of weak companies and its impact on resource allocation, economic growth, inflation, and financial stability. Using both firm-level and macroeconomic data, we find that recessions are a critical factor in the rapid increase in the number of zombie firms. Expansionary monetary policy can help reduce zombification when interest rates are at the zero lower bound (ZBL), but a too-accommodative monetary policy for extended periods is associated with a higher probability of zombification. Small and medium enterprises are more likely to become zombie firms. This raises concerns about the sustainability of too-easy monetary policy implementation, especially in countries where growth is lackluster. Our findings imply a tradeoff between conducting a countercyclical monetary policy, which also helps contain the increase in the number of zombie firms in cyclical downturns, and using an expansionary monetary policy for long periods, which may lead to a combination of low interest rates, low growth, and high financial vulnerability. Such a tradeoff is not a concern currently when most countries are tightening their monetary policy stance, but policymakers should be mindful of it during future recessions.

Keywords: Too Low for Too Long, Zombie Firms, Financial Stability, zombie firm, countercyclical monetary policy, monetary policy stance, sectoral zombie share, share of zombie, Economic recession, Output gap, Global financial crisis of 2008-2009, Monetary expansion, Unconventional monetary policies, Global

JEL Classification: E52, H81, O42, O47, E32, E23, G01, E43

Suggested Citation

Jafarov, Etibar and Minnella, Enrico, Too Low for Too Long: Could Extended Periods of Ultra Easy Monetary Policy Have Harmful Effects?. IMF Working Paper No. 2023/105, Available at SSRN: https://ssrn.com/abstract=4465105 or http://dx.doi.org/10.5089/9798400242748.001

Etibar Jafarov (Contact Author)

International Monetary Fund - European Department ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Enrico Minnella

University of Rome Tor Vergata - Department of Economics and Finance ( email )

Via columbia 2
Rome, Rome 00123
Italy

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