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

IMF Working Papers, May 19, 2023

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

Authors: Etibar Jafarov, Enrico Minnella
Publication: IMF Working Papers, Working Paper No. 2023/105
Date: May 19, 2023
Pages: 32
DOI: https://doi.org/10.5089/9798400241314.001
ISBN: 9798400241314
ISSN: 1018-5941
Core question: Do extended periods of ultra-easy monetary policy contribute to the zombification of weak companies, and what are the implications for resource allocation, economic growth, inflation, and financial stability?

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 (ZLB).
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.
Extended ultra-easy monetary policy raises concerns about sustainability in countries with lackluster growth.

There is a policy tradeoff:
- Countercyclical monetary policy helps contain the increase in zombie firms during cyclical downturns.
- Prolonged expansionary monetary policy may produce a combination of low interest rates, low growth, and high financial vulnerability.
Current context: The tradeoff is not an immediate concern when most countries are tightening their monetary policy stance, but it should be a consideration during future recessions.

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

IMF Working Paper No. 2023/105 — Etibar Jafarov and Enrico Minnella, May 19, 2023