Discussion Paper Details

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Title: Zombies at large? Corporate debt overhang and the macroeconomy

Author(s): Óscar Jordá, Martin Kornejew, Moritz Schularick and Alan M. Taylor

Publication Date: December 2020

Keyword(s): business cycles, Corporate Debt and local projections

Programme Area(s): Economic History, Financial Economics, International Macroeconomics and Finance and Monetary Economics and Fluctuations

Abstract: With business leverage at record levels, the effects of corporate debt overhang on growth and investment have become a prominent concern. In this paper, we study the effects of corporate debt overhang based on long-run cross-country data covering the near universe of modern business cycles. We show that business credit booms typically do not leave a lasting imprint on the macroeconomy. Quantile local projections indicate that business credit booms do not affect the economy's tail risks either. Yet in line with theory, we find that the economic costs of corporate debt booms rise when inefficient debt restructuring and liquidation impede the resolution of corporate financial distress and make it more likely that corporate zombies creep along.

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Bibliographic Reference

Jordá, Ó, Kornejew, M, Schularick, M and Taylor, A. 2020. 'Zombies at large? Corporate debt overhang and the macroeconomy'. London, Centre for Economic Policy Research.