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The Costs of Zombification in Europe: Why Austrian Economics Fails and the Empirical Findings for Japan are a Misleading Guide

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  4. Vol. 53, Issue 1
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Schlotmann, O., Eberhardt, F. The Costs of Zombification in Europe: Why Austrian Economics Fails and the Empirical Findings for Japan are a Misleading Guide. Credit and Capital Markets – Kredit und Kapital, 53(1), 17-42. https://doi.org/10.3790/ccm.53.1.17
Schlotmann, Olaf and Eberhardt, Frank "The Costs of Zombification in Europe: Why Austrian Economics Fails and the Empirical Findings for Japan are a Misleading Guide" Credit and Capital Markets – Kredit und Kapital 53.1, 2020, 17-42. https://doi.org/10.3790/ccm.53.1.17
Schlotmann, Olaf/Eberhardt, Frank (2020): The Costs of Zombification in Europe: Why Austrian Economics Fails and the Empirical Findings for Japan are a Misleading Guide, in: Credit and Capital Markets – Kredit und Kapital, vol. 53, iss. 1, 17-42, [online] https://doi.org/10.3790/ccm.53.1.17
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The Costs of Zombification in Europe: Why Austrian Economics Fails and the Empirical Findings for Japan are a Misleading Guide

Schlotmann, Olaf | Eberhardt, Frank

Credit and Capital Markets – Kredit und Kapital, Vol. 53 (2020), Iss. 1 : pp. 17–42

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Article Details

Publisher Name
Duncker & Humblot
DOI
https://doi.org/10.3790/ccm.53.1.17
Language
English
Pages
26
Keywords

Author Details

Prof. Dr. Olaf Schlotmann, Brunswick European Law School; Ostfalia Hochschule für angewandte Wissenschaften, Salzdahlumer Str. 46/48, 38302 Wolfenbüttel

Frank Eberhardt, Brunswick European Law School; Ostfalia Hochschule für angewandte Wissenschaften

Cited By

  1. Zombie firms: a systematic review and future research directions

    Shome, Samik

    Verma, Sushma

    (2024)

    https://doi.org/10.1007/s11301-024-00435-y [Citations: 0]

References

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  45. Banerjee, R./Hofmann, B. (2018): The Rise of Zombie Firms. Causes and consequences. in: BIS Quarterly Review: International Banking and Financial Market Developments, pp. 67–78.  Google Scholar
  46. Borio, C. E. V. (2018): A Blind Spot in Today’s Macroeconomics? Panel Remarks on BIS-IMF-OECD Joint Conference on “Weak Productivity: The Role of Financial Factors and Policies”, Paris.  Google Scholar
  47. Borio, C. E. V./Kharroubi, E./Upper, C./Zampolli, F. (2015): Labour Reallocation and Productivity Dynamics. Financial Causes, Real Consequences. in: BIS working papers, No. 534, Bank for International Settlements Monetary and Economic Department, Basel.  Google Scholar
  48. Bosse, F. (2002): Japan: Wirtschaftliche Strukturen, Bundeszentrale für politische Bildung. http://www.bpb.de/izpb/10174/wirtschaftliche-strukturen?p=all.  Google Scholar
  49. Brunnermeier, M./Koby, Y.: “The ‘Reversal Rate’: Effective Lower Bound on Monetary Policy”, presented at the BIS research network meeting, 14 March 2016. https://www.bis.org/events/confresearchnetwork1603/brunnermeier.pdf.  Google Scholar
  50. Caballero, R. J. /Hoshi, T./Kashyap, A. K. (2008): Zombie Lending and Depressed Restructuring in Japan. in: American Economic Review 98 (5), pp. 1943–1977.  Google Scholar
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  53. Gordon, R. J. (2010): Revisiting U. S. Productivity Growth over the Past Century with a View of the Future, NBER Working Paper Nr. 15834, March 2010.  Google Scholar
  54. Goto, Y./Wilbur, S. (2019): Unfinished Business: Zombie firms among SME in Japan`s lost decades, in: Japan & The World Economy 49, pp. 105–112.  Google Scholar
  55. Gouveia, A. F./Osterhold, C. (2018): Fear the Walking Dead. Zombie Firms, Spillovers and Exit Barriers, in: OECD productivity working papers, No. 13, June 2018, Paris.  Google Scholar
  56. King, M. (2016): The End of Alchemy. London.  Google Scholar
  57. Harford, T. (2018): Zombie Companies Walk Among Us, in: Financial Times, February 23th 2018.  Google Scholar
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  63. Koo, R. (2009): The Holy Grail of Macroeconomic Lessons from Japan`s Great Recession, Hoboken, NJ.  Google Scholar
  64. Koo, R. (2014): Blance sheet recession ist he resason for “secular stagnation.” https://voxeu.org/article/balance-sheet-recession-reason-secular-stagnation.  Google Scholar
  65. Kremer, D. (2019): Drohen uns Jahrzehnte ohne Zinsen?, in: Frankfurter Allgemeine Zeitung, April 06th 2019, https://www.faz.net/aktuell/finanzen/meine-finanzen/sparen-und-geld-anlegen/nullzinszeit-drohen-uns-jahrzehnte-ohne-zinsen-16128064.html.  Google Scholar
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  67. Meurers, M. (2003): Japan – Aufschwung auf fragilem Untergrund, in: Ifo-Schnelldienst 56 (21), pp. 42–51.  Google Scholar
  68. Obstfeld, M./Duval, R. (2018), Tight Monetary Policy Is Not the Answer to Weak Productivity Growth. https://voxeu.org/article/tight-monetary-policy-not-answer-weak-productivity-growth.  Google Scholar
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  76. Schumpeter, J. A. (1934): The Theory of Economic Development, translated by R. Opie, Cambridge, (MA).  Google Scholar
  77. Schumpeter, J. A. (1939): Business Cycles, New York.  Google Scholar
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  79. Starbatty, J./Stark, J. (2016): Schumpeter versus Keynes, in: Frankfurter Allgemeine Zeitung, December 30th 2016.  Google Scholar
  80. Storz, M./Koetter, M./Setzer, R./Westphal, A. (2017): Do We Want These Two to Tango? On Zombie Firms and Stressed Banks in Europe, in: Working paper series/European Central Bank, no 2104, October 2017, Frankfurt am Main.  Google Scholar
  81. Summers, L. H./Stanbury, A. (2019): Whither Central Banking, Project Syndicate. https://www.project-syndicate.org/commentary/central-bankers-in-jackson-hole-should-admit-impotence-by-lawrence-h-summers-and-anna-stansbury-2-2019-08.  Google Scholar
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  83. Wicksell, K. (1936): Interest and Prices, translated by R. F. Kahn, New York.  Google Scholar
  84. Wieland, V./Afanasyeva, E./Yoo, J./Kuete, M. (2016): New Methods for Macro-Financial Model Comparison and Policy Analysis, in Taylor J. B./Uhlig H. (eds.): Handbook of Macroeconomics, Vol 2, North Holland/Elsevier.  Google Scholar

Abstract

Supporters of the Austrian School of Economics and a number of empirical studies have claimed that the increasing number of “zombie” companies is a supply-side reason for the low growth rates in Europe. Often, these studies cite empirical findings for Japan to justify their claims, and conclude that in order to overcome the stagnation phase, bad investments and thus zombie companies should be eliminated from the production process. However, such creative destruction can only prove beneficial if innovative and highly productive companies replace these zombies under full utilization of resources. We ask whether findings on the zombie problem from empirical studies on Japan can be applied directly to the current European situation. We present facts contradicting the idea that productive companies would not have been able to exploit their growth potential in (southern) Europe, allegedly because they could not have found suitable employees since these were tied up in zombie companies on a massive scale. Even under the false assumption of full employment in Europe, existing empirical work shows that the losses due to zombification are only around 3.6?% of GDP over 10 years. In our calculation, that would be 100 euros per capita and year currently far too little to call for a drastic change in ECB monetary policy towards past long-run average short-term rates.

Table of Contents

Section Title Page Action Price
Olaf Schlotmann / Frank Eberhardt: The Costs of Zombification in Europe: Why Austrian Economics Fails and the Empirical Findings for Japan are a Misleading Guide 17
I. Introduction 18
1. Economic Reality and Walrasian Equilibrium 19
2. Schumpeter’s Analysis of Business Cycles 20
3. Empirical Zombie Research and the Course of the Investigation 21
II. Principles 23
1. Defining a Zombie Company 23
2. Effects of Zombie Firm Prevalence on Aggregate Production from a Neoclassical Perspective 24
III. Zombification by Boom and Bust Cycles 25
1. A Brief Look at Japan’s Recent Economc History 25
2. The Zombie Phenomenon in Japan 17
IV. Europe After the Crisis: Is There a Threat of “Japanization”? 17
1. Crowding-out of the Factor Capital 17
2. Crowding-out of the Factor Labor 17
3. What Are the Macroeconomic Costs of Zombie Companies? 17
4. Reflecting the Estimated Results 17
VI. The Cost of Zombification Versus the Risk of Secular Stagnation and Balance Sheet Recession in the Euro Area 18
References 18

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