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Zombie Credit and (Dis-)Inflation: Evidence from Europe

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  • Acharya, Viral
  • Crosignani, Matteo
  • Eisert, Tim
  • Eufinger, Christian

Abstract

We show that cheap credit to impaired firms has a disinflationary effect. By helping distressed firms to stay afloat, “zombie credit†can create excess production capacity, and in turn, put downward pressure on markups and prices. We test this mechanism exploiting granular inflation and firm-level data from twelve European countries. In the cross-section of industries and countries, we find that a rise of zombie credit is associated with a decrease in firm defaults and entries, firm markups and product prices; lower productivity; and, an increase in aggregate sales as well as material and labor cost. These results hold at the firm-level, where we document spillover effects to healthy firms in markets with high zombie credit. Our partial equilibrium estimates suggest that without a rise in ...

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  • Acharya, Viral & Crosignani, Matteo & Eisert, Tim & Eufinger, Christian, 2020. "Zombie Credit and (Dis-)Inflation: Evidence from Europe," CEPR Discussion Papers 14960, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14960
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    More about this item

    Keywords

    Zombie lending; Under-capitalized banks; Disinflation; Firm productivity; Eurozone crisis;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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