American Economic Review Vol. 115 No. 7 2025

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

Markus Brunnermeier¹; Sergio Correia²; Stephan Luck³; Emil Verner⁴; Tom Zimmermann⁵

¹ Princeton University (email: ) · ² Federal Reserve Bank of Richmond (email: ) · ³ Federal Reserve Bank of New York (email: ) · ⁴ MIT Sloan School of Management (email: ) · ⁵ University of Cologne (email: )

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 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.

DOI

10.1257/aer.20230685

Volume

115

Issue

7

Pages

2111-2150

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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