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

Author

Listed:
  • Markus Brunnermeier
  • Sergio Correia
  • Stephan Luck
  • Emil Verner
  • Tom Zimmermann

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.

Suggested Citation

  • Markus Brunnermeier & Sergio Correia & Stephan Luck & Emil Verner & Tom Zimmermann, 2025. "The Debt-Inflation Channel of the German (Hyper) Inflation," American Economic Review, American Economic Association, vol. 115(7), pages 2111-2150, July.
    • Handle: RePEc:aea:aecrev:v:115:y:2025:i:7:p:2111-50
    DOI: 10.1257/aer.20230685
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    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • N14 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: 1913-
    • N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-

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