Staff Reports
Zombie Credit and (Dis-)Inflation: Evidence from Europe
Number 955
December 2020

JEL classification: E31, E44, G21

Authors: Viral V. Acharya, Matteo Crosignani, Tim Eisert, and Christian Eufinger

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.

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AUTHOR DISCLOSURE STATEMENT(S)
Viral V. Acharya
I declare that I have no relevant or material financial interests that relate to the research described in the paper "Zombie Credit and (Dis-)Inflation: Evidence from Europe."

Matteo Crosignani
I declare that I have no relevant or material financial interests that relate to the research described in the paper "Zombie Credit and (Dis-)Inflation: Evidence from Europe."

Tim Eisert
The author declares that (s)he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Christian Eufinger
I declare that I have no relevant or material financial interests that relate to the research described in the paper "Zombie Credit and (Dis-)Inflation: Evidence from Europe."
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