Inflation and Disintermediation

86 Pages Posted: 17 Jun 2019 Last revised: 5 Nov 2019

See all articles by Isha Agarwal

Isha Agarwal

Cornell University

Matthew Baron

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: November 4, 2019


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 local house prices, construction employment, and capital expenditure at bank-dependent firms. Our results suggest that an important consequence of inflation is its distortion of the banking sector.

Keywords: inflation, monetary economics, banking, bank credit channel

JEL Classification: E31, E34

Suggested Citation

Agarwal, Isha and Baron, Matthew, Inflation and Disintermediation (November 4, 2019). Available at SSRN: or

Isha Agarwal

Cornell University ( email )

Ithaca, NY 14853
United States

Matthew Baron (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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