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

47 Pages Posted: 22 Apr 2020 Last revised: 18 May 2020

See all articles by Viral V. Acharya

Viral V. Acharya

New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Matteo Crosignani

University of Michigan at Ann Arbor - Finance

Tim Eisert

Erasmus University Rotterdam (EUR)

Christian Eufinger

IESE Business School

Multiple version iconThere are 2 versions of this paper

Date Written: March 27, 2020

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 zombie credit post 2012, annual inflation in Europe during 2012-2016 would have been 0.45 percentage points higher.

Keywords: Zombie Lending, Under-capitalized Banks, Disinflation, Firm Productivity, Eurozone Crisis

Suggested Citation

Acharya, Viral V. and Crosignani, Matteo and Eisert, Tim and Eufinger, Christian, Zombie Credit and (Dis-)Inflation: Evidence from Europe (March 27, 2020). Available at SSRN: https://ssrn.com/abstract=3562737 or http://dx.doi.org/10.2139/ssrn.3562737

Viral V. Acharya (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

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HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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New York University (NYU) - Department of Finance

Stern School of Business
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New York, NY 10012-1126
United States

Matteo Crosignani

University of Michigan at Ann Arbor - Finance ( email )

701 Tappan Street
Ann Arbor, MI 48109-1234
United States

Tim Eisert

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Christian Eufinger

IESE Business School ( email )

Avinguda de Pearson, 21
Barcelona, 08034
Spain

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