Macro-banking stability, sovereign debt and the inflation channel

Qingqing Cao, Raoul Minetti and Nicholas Rowe

Finance Research Letters, 2025, vol. 78, issue C

Abstract: We investigate the impact of inflation on banking stability. Using granular U.S. data from 1997 to 2014, we show that higher inflation induces a significant deterioration of banks’ capital position because of the maturity mismatch of banks’ assets and liabilities. Quantitative analysis reveals that the elasticity of banking capital to long-term inflation expectations is high, as a 1% increase to long-term inflation expectations leads to a 15% decrease in banks’ Tier 1 capital. The analysis suggests that the use of inflation to reduce sovereigns’ real debt burden could aggravate the sovereign-bank loop during debt crises.

Keywords: Banks; Inflation; Financial stability (search for similar items in EconPapers)
JEL-codes: E31 G21 H63 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:78:y:2025:i:c:s1544612325004076

DOI: 10.1016/j.frl.2025.107144

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