Inflating Away the Debt: The Debt-Inflation Channel of German Hyperinflation

Posted: 13 Jul 2023

See all articles by Markus K. Brunnermeier

Markus K. Brunnermeier

Princeton University - Department of Economics

Sergio Correia

Federal Reserve Banks - Federal Reserve Bank of Richmond

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: July 13, 2023

Abstract

The recent rise in price pressures around the world has reignited interest in understanding how inflation transmits to the real economy. Economists have long recognized that unexpected surges of inflation can redistribute wealth from creditors to debtors when debt contracts are written in nominal terms (see, for example, Fisher 1933). If debtors are financially constrained, this redistribution can affect real economic activity by relaxing financing constraints. This mechanism, which we call the debt-inflation channel, is well understood theoretically (for example, Gomes, Jermann, and Schmid 2016), but there is limited empirical evidence to substantiate it. In this post, we discuss new insights from one of the key events in monetary history: the Great German Inflation of 1919-23. Because this case of inflation was both surprising and extremely high, Germany’s experience helps shed light on how high inflation impacts firms’ economic activity through the erosion of their nominal debt burdens. These insights are based on a recently released research paper.


To view post: https://libertystreeteconomics.newyorkfed.org/2023/07/inflating-away-the-debt-the-debt-inflation-channel-of-german-hyperinflation/

Keywords: hyperinflation, debt-inflation, macro-finance

JEL Classification: E31, E52

Suggested Citation

Brunnermeier, Markus Konrad and Correia, Sergio and Luck, Stephan and Verner, Emil and Zimmermann, Tom, Inflating Away the Debt: The Debt-Inflation Channel of German Hyperinflation (July 13, 2023). Liberty Street Economics , Available at SSRN: https://ssrn.com/abstract=4509142

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

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

HOME PAGE: http://scorreia.com

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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