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arXiv · 2405.13296

The Debt-Inflation Channel of the German (Hyper-)Inflation

Markus K. Brunnermeier·Sergio Correia·Stephan Luck·Emil Verner·Tom Zimmermann
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Abstract

This paper studies how a large increase in the price level is transmitted to the real economy through firm balance sheets. Using newly digitized macro- and micro-level data from the German inflation of 1919-1923, we show that inflation led to a large reduction in real debt burdens and bankruptcies. Firms with higher nominal liabilities at the onset of inflation experienced a larger decline in interest expenses, a relative increase in their equity values, and higher employment during the inflation. The results are consistent with real effects of a debt-inflation channel that operates even when prices and wages are flexible.

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Markus K. Brunnermeier, Sergio Correia, Stephan Luck, Emil Verner, Tom Zimmermann. 2024-05-22. The Debt-Inflation Channel of the German (Hyper-)Inflation. https://doi.org/10.1257/aer.20230685

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