Inflation and Disintermediation

Isha Agarwal and Matthew Baron

Journal of Financial Economics, 2024, vol. 160, issue C

Abstract: We test a bank credit channel through which unexpected increases in inflation lead to short-run macroeconomic fluctuations. For identification, we study an unexpected U.S. inflation increase in early 1977 and exploit differences in state-level reserve requirements for Federal Reserve nonmember banks, which create differences in banks’ inflation exposures. More exposed banks reduce lending, lowering local house prices and construction employment. We provide evidence for potential mechanisms, including a bank net wealth and a loan misallocation channel. Our results suggest that an important consequence of inflation is its impairment of the banking sector.

Keywords: Inflation; Banking; Bank lending (search for similar items in EconPapers)
JEL-codes: E31 G21 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:160:y:2024:i:c:s0304405x24001259

DOI: 10.1016/j.jfineco.2024.103902

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