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A1118
Title: Structural determinants of credit market tightness and the zombie firm share Authors:  Philip Schnattinger - Bank of England (United Kingdom) [presenting]
Masahige Hamano - Waseda University (Japan)
Francesco Zanetti - University of Oxford (United Kingdom)
Abstract: A tractable model linking aggregate bank lending and heterogeneous production lines of non-financial firms is presented. Building on the dynamic stochastic general equilibrium product variety models, a frictional financial market supplying non-financial firms with credit is integrated into the framework. This extension renders credit market tightness, on which the probability of a firm successfully entering and producing positively depends, a non-trivial function of interest rates, productivity, competition, love for varieties, and the current states of active and inactive production lines producing varieties. Credit market tightness, wages, as well as the costs of entering and exiting productive and lending activities, are, in turn, shown to determine the share of zombie firms in an economy. The tractable model provides an explanation for the variation of the share of zombie firms in Europe and has wide applicability describing not only the determinants of capital-flushed economies exhibiting firm-zombiefication, but also capital-starved economies with insufficient credit market lending.