The Debt-Inflation Channel of the German Hyperinflation

74 Pages Posted: 30 Dec 2022 Last revised: 19 Jan 2023

See all articles by Markus K. Brunnermeier

Markus K. Brunnermeier

Princeton University - Department of Economics

Sergio Correia

Board of Governors of the Federal Reserve System

Stephan Luck

Federal Reserve Bank of New York

Emil Verner

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Tom Zimmermann

University of Cologne

Date Written: December 15, 2022

Abstract

Unexpected inflation can redistribute wealth from creditors to debtors. In the presence of financing frictions, such redistribution can impact the allocation of real activity. We use the German inflation of 1919-1923 to study how a large inflationary shock is transmitted to the real economy via a debt-inflation channel. In line with inflation reducing real debt burdens and relaxing financial constraints, we document a tight negative and convex relation between firm bankruptcies and inflation in aggregate data. Using newly digitized firm-level data, we further document a significant decline in leverage and interest expenses during the inflation. We show that firms that have more nominal liabilities at the onset of the inflation become more valuable in the stock market, face lower interest payments, and increase their overall employment once the inflation starts. The results are consistent with substantial real effects of the inflation through a financial channel that operates even when prices and wages are fully flexible.

Keywords: Inflation, macro-finance, macroeconomics, financial frictions, hyperinflation, economic history

JEL Classification: E01, E40, E50, G00, G20, G30

Suggested Citation

Brunnermeier, Markus Konrad and Correia, Sergio and Luck, Stephan and Verner, Emil and Zimmermann, Tom, The Debt-Inflation Channel of the German Hyperinflation (December 15, 2022). Available at SSRN: https://ssrn.com/abstract=4303537 or http://dx.doi.org/10.2139/ssrn.4303537

Markus Konrad Brunnermeier

Princeton University - Department of Economics ( email )

Bendheim Center for Finance
Princeton, NJ
United States
609-258-4050 (Phone)
609-258-0771 (Fax)

HOME PAGE: http://www.princeton.edu/¡­markus

Sergio Correia

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Stephan Luck (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Emil Verner

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Tom Zimmermann

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

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