Inflation and Disintermediation

97 Pages Posted: 17 Jun 2019 Last revised: 28 Mar 2022

See all articles by Isha Agarwal

Isha Agarwal

University of British Columbia

Matthew Baron

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: March 28, 2022

Abstract

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

Agarwal, Isha and Baron, Matthew, Inflation and Disintermediation (March 28, 2022). Available at SSRN: https://ssrn.com/abstract=3399553 or http://dx.doi.org/10.2139/ssrn.3399553

Isha Agarwal

University of British Columbia ( email )

2053 Main Mall
869, Henry Angus Building
Vancouver, NY V6T1Z2
Canada

Matthew Baron (Contact Author)

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

Ithaca, NY 14853
United States

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