External Economics Seminar Series - Philip Schnattinger

Philip Schnattinger

Bank of England

Title:

Credit Market Tightness and the Zombie Firm Share

Abstract:

This paper finds that times of higher credit availability often result in a smaller share of zombie firms. We then present a tractable model linking aggregate bank lending and heterogeneous production lines of non-financial firms explaining this relation and describing the conditions under which it holds. Our model builds on the dynamic stochastic general equilibrium product variety models in Bilbiie et al. (2012), Hamano and Zanetti (2017), and Hamano and Zanetti (2022). We extend these with a frictional financial market supplying non-financial firms with credit is integrated into the frame- work. 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, as well as the costs of entering and exiting productive activities, are in turn shown to determine the general equilibrium share of zombie firms in an economy. Intuitively, higher credit market tightness will reduce the value of obtaining external financing and increase com- petition, meaning that more credit availability will lead to a higher productivity cutoff and fewer zombie firms. The tractable model explains the dynamics of credit market tightness and the share of zombie firms in the United Kingdom and European Union Member States.