Document Type

Honors Thesis


In this paper we investigate the interaction between interest rates and the prevalence of so called ‘Zombie’ firms. Zombie firms are relatively unproductive, insolvent firms, who nevertheless remain in the market. The past several decades have witnessed a steady rise in the prevalence of these firms across advanced economies. Significant evidence now exists of their detrimental effects on healthy firms within their industries and on the economy as a whole through allocative inefficiencies and drags on productivity growth. Notably, this zombie phenomenon coincides with the long-term lowering trend in benchmark interest rates, providing a theoretical life-support mechanism through which zombie firms are nurtured. Using firm-level panel data from the CompustatCapital-IQ database, we confirm that there has been rise in the share of zombie firms and show that there exists a significant inverse relationship between interest rates and zombie firms. Presenting a possible challenge for conventional monetary policy as central banks are faced with a tradeoff between dampening productivity in the long term and invigorating it in the short term.

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