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

50 Pages Posted: 29 Jun 2020 Last revised: 16 Aug 2020

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: June 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 ...

Keywords: Disinflation, eurozone crisis, Firm productivity, Under-capitalized Banks, zombie lending

JEL Classification: E31, E44, G21

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 (June 2020). CEPR Discussion Paper No. DP14960, Available at SSRN: https://ssrn.com/abstract=3638066

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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