Zombies at Large? Corporate Debt Overhang and the Macroeconomy

Abstract

What are the macroeconomic consequences of business credit booms? Are they as dangerous as household credit booms? If not, why not? We answer these questions by collecting data on nonfinancial business liabilities (primarily bank loans and corporate bonds) for 17 advanced economies over the past 150 years. Unlike household credit, business credit booms are rarely followed by macroeconomic hangovers. Data on debt renegotiation costs—instrumented by a country’s legal tradition—show that frictions to debt resolution make recessions deeper and longer—an important factor in explaining the differences with household credit booms.

Support for small businesses amid COVID‐19

“…Jordà et al . (2020) provide long‐run evidence on the economic costs of corporate debt booms and inefficient debt restructuring. Our paper contributes to these two groups of literature by presenting a model on how to balance the policy trade‐off between them and search for the social optimum.…”

A robust examination of COVID‐19 and country risk: Perspectives from the G10 countries

“…World governments have reflected the fear of lack of public financing by raising the yield on government bonds being treated as country risk premium by international investors. This adjustment was accompanied by real‐time rises in public debt and budget deficits, although empirical evidence shows a reverse effect on country's economic development (Jordà et al., 2020; Reinhart and Rogoff 2010; Reinhart et al. 2012; Romer and Romer 2017, 2018, 2019).…”