Inflation and Disintermediation
115 Pages Posted: 17 Jun 2019 Last revised: 26 Oct 2023
Date Written: October 26, 2023
We test a bank credit channel through which unexpected increases in inflation lead to short-run macroeconomic fluctuations. For identification, we study an unexpected U.S. inflation increase in early 1977 and exploit differences in state-level reserve requirements for Federal Reserve nonmember banks, which create differences in banks’ inflation exposures. More exposed banks reduce lending, lowering local house prices and construction employment. We provide evidence for potential mechanisms, including a bank net wealth and a loan misallocation channel. Our results suggest that an important consequence of inflation is its impairment of the banking sector.
Keywords: inflation, monetary economics, banking, bank credit channel
JEL Classification: E31, E34, G21
Suggested Citation: Suggested Citation