Working Paper: CEPR ID: DP14960
Authors: Viral V. Acharya; Matteo Crosignani; Tim Eisert; Christian Eufinger
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: Zombie Lending; Undercapitalized Banks; Disinflation; Firm Productivity; Eurozone Crisis
JEL Codes: E31; E44; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Zombie credit (G51) | firm defaults (G32) |
| Zombie credit (G51) | firm entries (M13) |
| Zombie credit (G51) | inflation (E31) |
| Share of zombie firms (D26) | firm markups (D43) |
| Share of zombie firms (D26) | product prices (D49) |
| Share of zombie firms (D26) | productivity (O49) |
| Healthy firms in markets with high zombie firms (L10) | firm markups (D43) |
| Healthy firms in markets with high zombie firms (L10) | investment (G31) |
| Healthy firms in markets with high zombie firms (L10) | sales growth (O49) |
| Healthy firms in markets with high zombie firms (L10) | input costs (D24) |