Abstract: We uncover a new channel—the zombie lending channel—in the transmission of monetary policy to nonfinancial corporates. This channel originates from the presence of unviable and unproductive (zombie) firms. We identify exogenous variation in monetary conditions around the world by exploiting the international transmission of US monetary policy shocks. We find that tighter monetary policy leads to more favorable credit conditions for zombie firms relative to other firms. Zombies are then able to cut investment and employment by relatively less. This is indicative of evergreening motives by lenders when interest rates rise: lenders face incentives to restructure existing loans of zombie firms to avoid the realization of losses on their balance sheets. Policies that strengthen banks’ balance sheets, that limit banks’ incentives to engage in risky behavior, and laws that allow an efficient resolution of weak firms, may help mitigate zombie lending practices when financial conditions tighten.
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Abstract: This paper highlights how the Federal Reserve’s Secondary Market Corporate Credit Facility (SMCCF), launched in March 2020, influenced bank loan supply to private, bank-dependent firms through a distinct capital structure channel. Specifically, firms with bond market access increased bond issuance, allowing capital-constrained banks to expand lending to firms without such access. Using a theoretical model and loan-level data within an event study framework, this paper shows that this channel operates exclusively through banks facing capital constraints, while unconstrained banks exhibited no significant change in lending behavior. Although the overall spillover effects of the SMCCF were modest given the relatively strong capital positions of U.S. banks during the period, these findings underscore the importance of bank constraints in amplifying the transmission of corporate bond purchase programs to the broader credit market.
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Abstract: An increasing share of firms borrows from the public financing market, in addition to banks. The paper shows that corporate debt structure matters for the credit channel of monetary policy transmission. Firms with higher dependence on loans experience a lower interest rate pass-through in their borrowing and investment after expansionary monetary policy shocks. But there are no significant differences in responses to contractionary monetary policy shocks. Moreover, this paper shows that leverage matters more for heterogeneous responses to contractionary monetary policy shocks while liquidity matters more for expansionary shocks.