DP14960 Zombie Credit and (Dis-)Inflation: Evidence from Europe

Author(s): Viral V. Acharya, Matteo Crosignani, Tim Eisert, Christian Eufinger
Publication Date: June 2020
Keyword(s): Disinflation, eurozone crisis, Firm productivity, Under-capitalized Banks, zombie lending
JEL(s): E31, E44, G21
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14960

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 ...