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

Author(s): Viral V. Acharya, Matteo Crosignani, Tim Eisert and Christian Eufinger

Publication Date: June 2020

Keyword(s): Disinflation, eurozone crisis, Firm productivity, Under-capitalized Banks and zombie lending

Programme Area(s): Financial Economics

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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Bibliographic Reference

Acharya, V, Crosignani, M, Eisert, T and Eufinger, C. 2020. 'Zombie Credit and (Dis-)Inflation: Evidence from Europe'. London, Centre for Economic Policy Research.