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

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  • Markus K. 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.

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  • Markus K. Brunnermeier & Sergio Correia & Stephan Luck & Emil Verner & Tom Zimmermann, 2024. "The Debt-Inflation Channel of the German (Hyper-)Inflation," Papers 2405.13296, arXiv.org.
    • Handle: RePEc:arx:papers:2405.13296
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    1. Schnorpfeil, Philip & Weber, Michael & Hackethal, Andreas, 2023. "Households' response to the wealth effects of inflation," SAFE Working Paper Series 400, Leibniz Institute for Financial Research SAFE.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G0 - Financial Economics - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • N2 - Economic History - - Financial Markets and Institutions

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