Inflation and Disintermediation
95 Pages Posted: 17 Jun 2019 Last revised: 25 May 2021
Date Written: May 25, 2021
In a 47-country panel, large inflation increases tend to be followed by aggregate lending contractions, driven by banks with balance sheets most negatively exposed to inflation. We explore how rising inflation affects the macroeconomy through a banking channel by studying an unexpected U.S. inflation increase in early 1977. Our identification strategy exploits differences in reserve requirements across states for Fed nonmember banks, leading banks to be differentially exposed to unexpected inflation increases. More exposed banks cut lending, reducing local house prices and construction employment. Our results suggest 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