Monetary Policy, Firms' Extensive Margin and Productivity

This paper explores a macroeconomic notion of zombification by analyzing whether monetary policy affects productivity via firms' extensive margin. Using a general equilibrium model with heterogeneous firms, we show that monetary policy lowers productivity if it raises corporate profitability: a rise in profitability allows low-productivity incumbents to remain and unproductive new firms to enter the market. Our empirical analysis demonstrates that U.S. expansionary monetary policy raises corporate profits, reduces firm exit and increases entry. However, we do not find broad-based evidence of expansionary monetary policy reducing productivity; if at all, this effect appears to be limited to small firms. We conclude that zombification induced by monetary policy is either associated with quantitatively limited productivity effects or mutually offsetting with other productivity channels.