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

Markus Brunnermeier, Sergio Correia, Stephan Luck, Emil Verner and Tom Zimmermann

American Economic Review, 2025, vol. 115, issue 7, 2111-50

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.

JEL-codes: D22 E23 E31 G32 N14 N24 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1257/aer.20230685

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