Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/241148 
Year of Publication: 
2020
Series/Report no.: 
Staff Report No. 955
Publisher: 
Federal Reserve Bank of New York, New York, NY
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.
Subjects: 
zombie lending
undercapitalized banks
disinflation
firm productivity
eurozone
JEL: 
E31
E44
G21
Document Type: 
Working Paper

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