Many argue that “too low for too long" interest rates, aimed at stimulating the economy in the short run, might lead to low productivity and threaten financial stability in the medium run. Low interest rates not only lead to more borrowing, but they also affect the quality of that borrowing via allocation of credit across firms. Thus, expansionary monetary policy might bring higher credit growth, investment, and output today, at the expanse of a corporate debt overhang with zombie firms, and a higher probability of financial crises, hampering investment and growth in the future.
Recent analysis of a new confidential supervisory firm-bank matched data set documents new facts about the credit market. Does monetary policy work the same way for SMEs and large listed firms in terms of credit borrowed and interest rate paid? Do firms and banks with high or low leverage respond similarly to monetary policy surprises? Do different types of collateral pledged by different firms have any effect? These questions and related policy implications will be discussed during this session.