Inflation and Disintermediation

36 Pages Posted: 17 Jun 2019

See all articles by Isha Agarwal

Isha Agarwal

Cornell University

Matthew Baron

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: March 19, 2018


This paper explores a novel channel through which unexpected inflation leads to adverse short-run effects on the macroeconomy. We hypothesize that unexpected inflation shocks weaken the banking sector (mainly due to asset-liability mismatch), which leads to credit contraction, which, in turn, transmits the shock to the real economy. We test this hypothesis in two settings. In the first setting, which looks at a sudden and unexpected inflation shock in the U.S. in mid-1976, we exploit across-state differences in reserve requirements for state-chartered non-member banks and within-state differences between state- and nationally-chartered banks. These differences substantially affect bank cash holdings, and thus banks’ inflation exposure. Through the affected banks, the inflation shock is then transmitted to the real economy through a lending contraction, with small bank-dependent non-financial firms most affected. The housing channel is especially important: the inflation shock leads to decreases in house prices, mortgage lending, housing starts, and construction employment. In a second setting, we use newly-uncovered historical data on individual banks’ financial statements to explore prominent high inflation episodes of the past, from France in the 1920s to Argentina, Brazil, Turkey, and Venezuela in recent decades. We exploit banks’ cross-sectional heterogeneity in exposure to large, unexpected inflations to show the importance of the banking channel in these prominent historical inflation episodes.

Keywords: inflation, monetary economics, banking

JEL Classification: E31, E34

Suggested Citation

Agarwal, Isha and Baron, Matthew, Inflation and Disintermediation (March 19, 2018). 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

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics