Banks' Inflation Expectations and Credit Allocation: the Fisher Effect

This paper investigates how lenders’ inflation expectations shape credit allocation. Banks expecting higher inflation reallocate credit towards ex-ante leveraged firms, which benefit from a reduction in real debt burdens. To test this hypothesis, we combine individual bank macroeconomic forecasts for developed economies with syndicated loan data from 1991 to 2021. We show that banks expecting a 1 percentage point higher inflation over the next year extend loans that are 15% larger and 17 basis points cheaper to firms with high long-term leverage, relative to banks with lower inflation expectations. Importantly, the effects are not present for firms with high short-term leverage, whose real value is harder to reduce. Consistent with this pattern, firms receiving loans from banks with higher inflation expectations increase their capital expenditure relative to otherwise similar firms borrowing from banks with lower expectations.