Inflation and Disintermediation
56 Pages Posted: 17 Jun 2019 Last revised: 4 Sep 2019
Date Written: March 19, 2018
In a country-level panel from 1870 to 2016, large increases in inflation are associated with lower future bank credit-to-GDP, even in the absence of monetary tightening. The lending contraction is primarily driven by banks with balance sheets most negatively exposed to inflation increases. To better understand how inflation shocks transmit to the macroeconomy through a banking channel, we study an unexpected inflation increase in the U.S. in early-1977. Our identification strategy exploits differences in reserve requirements across U.S. states for Fed nonmember banks, leading banks to be differentially exposed to unexpected inflation increases. More exposed banks reduce lending, which in turn reduces new mortgages, construction employment, and credit to bank-dependent firms. Our results suggest that an important consequence of inflation is its distortion of the banking sector.
Keywords: inflation, monetary economics, banking
JEL Classification: E31, E34
Suggested Citation: Suggested Citation