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

Journal of Finance

78 Pages Posted: 22 Apr 2020 Last revised: 8 Sep 2023

See all articles by Viral V. Acharya

Viral V. Acharya

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

Matteo Crosignani

Federal Reserve Banks - Federal Reserve Bank of New York

Tim Eisert

Nova School of Business and Economics; Centre for Economic Policy Research (CEPR)

Christian Eufinger

IESE Business School

Multiple version iconThere are 4 versions of this paper

Date Written: March 27, 2020

Abstract

We show that ``zombie credit''---subsidized credit to non-viable firms---has a disinflationary effect. By keeping these firms afloat, zombie credit creates excess aggregate supply, thereby putting downward pressure on prices. Granular European data on inflation, firms, and banks confirm this mechanism. Markets affected by a rise in zombie credit experience lower firm entry and exit, capacity utilization, markups, and inflation, as well as a misallocation of capital and labor, which results in lower productivity, investment, and value added. If weakly-capitalized banks were recapitalized in 2009, inflation in Europe would have been up to 0.21pp higher post-2012.

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

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Crosignani, Matteo and Eisert, Tim and Eufinger, Christian, Zombie Credit and (Dis-)Inflation: Evidence from Europe (March 27, 2020). Journal of Finance, 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 (NYU) - Leonard N. Stern School of Business ( email )

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HOME PAGE: http://www.stern.nyu.edu/~vacharya

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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Centre for Economic Policy Research (CEPR) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Matteo Crosignani

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

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Tim Eisert

Nova School of Business and Economics ( email )

Campus de Carcavelos
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Carcavelos, 2775-405
Portugal

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Christian Eufinger

IESE Business School ( email )

Avinguda de Pearson, 21
Barcelona, 08034
Spain

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