The Debt-Inflation Channel of the German (Hyper-)inflation

Abstract

This paper studies how a large increase in the price level is transmitted to the real economy through firm balance sheets. Using newly digitized macro- and micro-level data from the German inflation of 1919-1923, we show that inflation led to a large reduction in real debt burdens and bankruptcies. Firms with higher nominal liabilities at the onset of inflation experienced a larger decline in interest expenses, a relative increase in their equity values, and higher employment during the inflation. The results are consistent with real effects of a debt-inflation channel that operates even when prices and wages are flexible.

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

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