The Zombie Lending Channel of Monetary Policy

We identify a new channel in the monetary policy transmission to nonfinancial corporates—the zombie lending channel. Our findings show that unviable and unproductive zombie firms are less affected by contractionary monetary policy relative to other firms because of a more muted tightening in credit conditions. We rationalize this result with a strengthening in evergreening motives when interest rates rise: lenders face incentives to extend loans to zombies to prevent them from defaulting. Strengthening banks’ balance sheets and curbing risky lending behavior could help mitigate zombie lending practices when financial conditions tighten. This paper was accepted by Tomasz Piskorski, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.07315 .