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

Viral Acharya, Matteo Crosignani, Tim Eisert () and Christian Eufinger ()

No 955, Staff Reports from Federal Reserve Bank of New York

Abstract: We show that “zombie credit”—cheap credit to impaired firms—has a disinflationary effect. By helping distressed firms to stay afloat, such credit creates excess production capacity, thereby putting downward pressure on product prices. Granular European data on inflation, firms, and banks confirm this mechanism. Industry-country pairs affected by a rise of zombie credit show lower firm entry and exit rates, markups, and product prices, as well as a misallocation of capital and labor, which results in lower productivity, investment, and value added. Without a rise in zombie credit, inflation in Europe would have been 0.4 percentage point higher post-2012.

Keywords: zombie lending; undercapitalized banks; disinflation; firm productivity; eurozone (search for similar items in EconPapers)
JEL-codes: E31 E44 G21 (search for similar items in EconPapers)
Pages: 77
Date: 2020-12-01
New Economics Papers: this item is included in nep-eec, nep-eff, nep-fdg, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

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Working Paper: Zombie Credit and (Dis-)Inflation: Evidence from Europe (2020) Downloads
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