Inflation and Disintermediation
97 Pages Posted: 17 Jun 2019 Last revised: 28 Mar 2022
Date Written: March 28, 2022
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 cut lending, reducing 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