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Report

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


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;

JEL Classification: E31; E44; G21;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2020-12-01

Number: 955