The Real Effects of Zombie Lending in Europe

Belinda Tracey

Oxford Bulletin of Economics and Statistics, 2025, vol. 87, issue 1, 122-154

Abstract: ‘Zombie lending’ occurs when a lender supports an otherwise insolvent borrower. Recent studies document that zombie lending has been widespread following the European sovereign debt crisis. In this paper, I develop a quantitative model to study the impact of these lending practices on firm dynamics. In the model, firm liquidations and zombie lending arise endogenously. The model provides a good match to key euro‐area firm statistics over the period 2011–14. I find that zombie lending has a substantial impact on borrowing costs, helping more low‐productivity firms to survive. This, in turn, causes a drag on aggregate output, investment and productivity.

Date: 2025
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https://doi.org/10.1111/obes.12636

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Persistent link: https://EconPapers.repec.org/RePEc:bla:obuest:v:87:y:2025:i:1:p:122-154

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