Zombie Credit and (Dis-)Inflation: Evidence from Europe
77 Pages Posted: 5 Jan 2021
Date Written: December 2020
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
JEL Classification: E31, E44, G21
Suggested Citation: Suggested Citation