Topic: Zombie Firm Dynamics and China's Monetary Policy
Lecturer: Wei LI, School of Economics and Management, Beihang University
Time: 10:30-12:00 a.m. December 5h, 2019 (Monday)
Venue: B423, Zhixin Building
Abstract: By examining dynamics of zombie firms with respect to both the intensive margin and extensive margin, we study the distributional effects of monetary policy on firm performance and reallocation dynamics in China. Based on China Industrial Enterprise database from 1998 to 2013, this paper documents the evidence of two competing forces arising from China's monetary policy practices. First, monetary expansion leads to an improvement upon the extensive margin of Chinese firm dynamics by selecting good firms out of the bad league of ``zombie" firms that are marked by negative profits and subsidized borrowing. Simultaneously, conditional on staying as zombies, these firms are associated with greater resource misallocations, thus an deterioration at the intensive margin. Precisely, we show why zombie firms exits: monetary stimulus brings forth improved revenue without further distorting the borrowing cost of these firms. For very persistent zombie firms, leverage went up and revenue was down in spite of increasingly subsidized borrowings. We then build a heterogeneous-firm model to study zombie firm dynamics.