The Debt-Inflation Channel of the German Hyperinflation

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.

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