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

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

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

  • Markus Brunnermeier
  • Sergio Correia
  • Stephan Luck
  • Emil Verner
  • Tom Zimmermann
American Economic Review (Forthcoming)

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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