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from Liberty Street Economics Even after the unprecedented stimulus by central banks in Europe following the global financial crisis, Europe’s economic growth and inflation have remained depressed, consistently undershooting projections. In a striking resemblance to Japan’s “lost decades, the European economy has been recently characterized by persistently low interest rates and the provision of cheap bank credit to impaired firms, or “zombie credit. In this post, based on a recent staff report, we propose a “zombie credit channel that links the rise of zombie credit to dis-inflationary pressures. How does zombie credit affect inflation? Weak banks have an incentive to extend zombie credit to avoid, or at least delay, the realization of losses on their outstanding loans. While the earliest evidence of zombie credit goes back to Japan in the 1990s, more recent studies document an increase in zombie lending globally and, in particular, in the European context. The char

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