Working Paper: NBER ID: w31298
Authors: Markus K. Brunnermeier; Sergio A. Correia; Stephan Luck; Emil Verner; Tom Zimmermann
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: Debt-Inflation Channel; German Hyperinflation; Firm Balance Sheets; Employment; Bankruptcies
JEL Codes: E31; G00; G20; G30; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inflation (E31) | Reduction in real debt burdens for levered non-financial firms (G32) |
| Reduction in real debt burdens for levered non-financial firms (G32) | Decline in bankruptcies (K35) |
| Inflation (E31) | Decline in bankruptcies (K35) |
| Higher nominal liabilities at onset of inflation (E31) | Larger decline in interest expenses (G32) |
| Higher nominal liabilities at onset of inflation (E31) | Increase in equity values (G19) |
| Higher nominal liabilities at onset of inflation (E31) | Higher employment (J68) |
| 10 percentage point increase in initial leverage (G32) | 35% increase in employment (J68) |
| Higher leverage and greater proportion of long-term debt (G32) | Larger decline in interest expenses (G32) |
| High leverage firms (G32) | Larger increase in real value of book equity (G32) |
| Debt-inflation channel (E31) | 17% increase in overall employment (J23) |
| Robustness tests (C52) | Rule out confounding factors (C90) |