ZOMBIE FIRMS & THE MACROECONOMY: A BAYESIAN VECTOR AUTOREGRESSION ANALYSIS

Abstract

The objective of this paper is twofold: (i) to resolve the question of how zombie firms emerge, and (ii) to understand whether zombie firms are responsible for depressing aggregate productivity, investment, and prices in the US economy from 1980-2020. We estimate a Bayesian Vector Autoregression (VAR) and Impulse Response Functions using a distribution of Interest Coverage Ratios (ICRs) to measure aggregate firm performance and key macroeconomic variables, including the Federal Funds rate, aggregate bank capitalization, the Industrial Production Index, the PCE deflator, and the share of private investment in real GDP. We contend that the literature has conflated a ”zombie spillover effect” for a simple level effect in the aggregate amount of corporate debt, which we show is associated with debt overhang. These findings have potential ramifications for unconventional monetary policy during recessionary and recovery eras, such as the COVID-19 pandemic, and the distortionary effects associated with credit misallocation and debt overhang.