Working Paper: NBER ID: w27158
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 zombie credit post 2012, annual inflation in Europe during 2012-2016 would have been 0.45 percentage points higher.
Keywords: Zombie Credit; Disinflation; Europe; Firm Defaults; Inflation
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) |
| excess production capacity (D24) | markups (D43) |
| excess production capacity (D24) | product prices (D49) |
| zombie credit (G51) | inflation (E31) |
| zombie credit (G51) | productivity (O49) |
| zombie credit (G51) | aggregate sales (Q11) |
| zombie credit (G51) | material costs (L74) |
| zombie credit (G51) | healthy firms' markups (D21) |
| zombie credit (G51) | healthy firms' profitability (L21) |